Market Slide Fueled by Yield Concerns and Fed Anticipation: Powell’s Speech Awaited

August 23, 2023

The S&P 500 experienced a 0.3% decline driven by concerns over rising Treasury yields and upcoming remarks from Federal Reserve Chairman Jerome Powell. The decline was also impacted by a drop in banking and retail shares. The Dow Jones Industrial Average followed suit, slipping by 0.5% to 34,288.83, while the Nasdaq Composite managed a small gain at 13,505.87. Notably, Nvidia’s stock dipped 2.9%, offsetting an earlier increase.

Bank ratings adjustments and challenging operating conditions caused several banks, both regional and larger, to witness declines. Consequently, the financial sector saw a 0.9% drop, making it the day’s poorest-performing sector within the S&P 500. Major banks like KeyCorp, Comerica, and JPMorgan Chase faced declines of 4.1% and 2.1% respectively. Meanwhile, Dick’s Sporting Goods and Macy’s tumbled by 24% and 14%, leading to a downward trajectory for the SPDR S&P Retail ETF. Nike also recorded over a 1% slide, marking its ninth successive daily loss. Wall Street’s attention has been on the bond market, particularly the 10-year Treasury yield, which reached its highest point since 2007 during the week. The yield dipped slightly to 4.33% on Tuesday.

Market analysts anticipate a continued market pullback. They point to the influence of climbing yields and a cautious consumer sentiment as drivers of this trend. Investors are eagerly awaiting Federal Reserve Chairman Jerome Powell’s speech at the Jackson Hole economic symposium on Friday, which is expected to provide insights into the central bank’s future monetary policy decisions.

Data by Bloomberg

On Tuesday, most sectors experienced a slight decline, with the overall market slipping by 0.28%. The Real Estate sector managed a 0.28% gain, while Utilities and Communication Services saw increases of 0.26% and 0.18% respectively. On the positive side, Consumer Discretionary showed a marginal uptick of 0.09%. However, several sectors faced losses, including Energy and Financials, which saw declines of 0.77% and 0.88% respectively. The Consumer Staples sector had the largest drop at 0.53%, followed by Health Care at 0.37%, Information Technology at 0.24%, and Industrials at 0.20%.

Major Pair Movement

The dollar index exhibited a 0.24% increase, led by a 0.36% decline in EUR/USD, pushing the euro close to breaking its pivotal lows from July. The possibility of this break is tied to Federal Reserve Chair Jerome Powell’s upcoming speech at Jackson Hole and the potential for its content to align with statements from Richmond Fed President Barkin. Despite a temporary alleviation from recent events that might have contributed to the Treasury yield’s retreat from post-GFC highs, the 2-year bund-Treasury yield spreads hit new lows for 2023. This shift coincided with the Treasury curve inverting further due to the attraction of high 10-year yields and short-covering. Barkin’s comments, which deviated from his generally dovish stance, introduced the risk that Powell could emphasize relative U.S. economic strength and the importance of achieving the Fed’s 2% inflation mandate.

The uncertainty centers on the potential length of elevated interest rates by the Fed and the implications for inflation. The conversation also includes evaluating the impact of China’s economic challenges. Jens Eskelund, President of [unspecified institution], weighed in on these matters. Despite the Fed’s stance based on strong economic growth and a tight labor market, both S&P and Moody’s have expressed concerns, leading to a market prediction of almost 100 basis points of Fed rate cuts next year, coinciding with one of the most rapid rate increases in decades. The USD/JPY pair dropped by 0.25%, reflecting a retreat in Treasury yields, while sterling faced a 0.13% decline due to factors including the dollar’s broader rebound from Barkin’s comments and an equities pullback. USD/CNH saw a 0.22% rise, in contrast to USD/CNY’s 0.09% gain. The focus now shifts to the global PMIs scheduled for Wednesday and Powell’s upcoming presentation on Friday.

Picks of the Day Analysis

EUR/USD (4 Hours)

EUR/USD Hits Mid-June Lows Amidst Dollar’s Strength and Economic Concerns

The EUR/USD currency pair experienced a significant drop, marking its lowest daily close since mid-June. The decline came after a brief two-day recovery, highlighting the persistent pressure on the pair driven by a strong US Dollar. The Eurozone’s current account surplus of €35.8 billion in June, attributed to reduced imports due to lower energy prices, is juxtaposed against expectations of a slight dip in the August PMI composite index. The Eurozone’s economic concerns are further fueled by a cautious market atmosphere, contrasting the robustness of the US economy. As the US Dollar Index (DXY) surged above 103.50 and US Treasury yields rose, data from the US housing market added to the narrative. Attention now turns to the forthcoming Jackson Hole Symposium, where addresses by Federal Reserve Chair Powell and European Central Bank President Lagarde are eagerly anticipated.

Chart EURUSD by TradingView

According to technical analysis, the EUR/USD moved lower on Tuesday and managed to reach the lower band of the Bollinger Bands. Currently, the price is slightly above the lower band of the Bollinger Bands. The Relative Strength Index (RSI) currently stands at 39, indicating that the EUR/USD is currently back in a bearish mode.

Resistance: 1.0935, 1.1038

Support: 1.0837, 1.0789

XAU/USD (4 Hours)

XAU/USD‘s Volatile Rally Amidst Dollar’s Rebound and Market Uncertainty

The XAU/USD currency pair experienced a fluctuating rally, surging to $1,904.44 in London trading before reversing due to renewed US Dollar demand, prompted by S&P Global Ratings’ downgrade of US bank ratings following a similar move by Moody’s. Equities maintained a bullish tone as Wall Street and European indexes held onto gains despite retracements from intraday highs, and XAU/USD recovered from its low of $1,889.12. The Dollar’s performance was influenced by rising government bond yields, with the 10-year Treasury note hitting 4.366% and the 2-year note reaching 5.01%. Market unease prevailed ahead of the Jackson Hole Symposium, where speeches by US Federal Reserve Chair Jerome Powell and European Central Bank President Christine Lagarde are anticipated.

Chart XAUUSD by TradingView

Based on technical analysis, the XAU/USD moved higher on Tuesday and was able to reach the upper band of the Bollinger Bands. Currently, the price is moving just below the upper band of the Bollinger Bands. The Relative Strength Index (RSI) is currently at 55, indicating that the XAU/USD pair is now in a neutral stance with a slight bull mode.

Resistance: $1,907, $1,916

Support: $1,896, $1,885

Economic Data