From Barron's Stocks to Watch:
The summer of calm gave way to chaos today as all major indexes tumbled well more than 1%.
The S&P 500 dropped 2.5% to 2,127.81 today, while the Dow Jones Industrial Average fell 394.46 points, or 2.1%, to 18,085.45. The Nasdaq Composite tumbled 2.5% to 5,125.91. The CBOE Volatility Index, or Vix, soared 40% to 17.50, the most since Brexit.
The market’s selloff is being blamed on the increasing likelihood for a September rate hike, and who are we to argue. Deutsche Bank’s Alan Ruskin doesn’t think the Fed should let the market dictate monetary policy:
The Fed has to break the cycle of the market having too
much sway over their own policy and now is as opportune moment as any.
It is thoroughly unhealthy for the market and policymakers to look at a
low probability for a hike and conclude that it is too low for the Fed
to tighten, which then becomes self determining, and the key factor
driving the probability down! This gives the market way too much power
over policy – especially when the market appears intent on ignoring Fed
speak. One Fed hike that goes against the market probabilities, and in
favor of Fed jawboning will get the market to listen to the Fed in the
future. This lesson is long overdue, and consistent with the Fed’s
stated desire of being less predictable than in the 2004 – 2006 cycle.
Remember the market probability holds power over the Fed IF the Fed
fears a major risk sell-off if they surprise the mkt. The good news for a
more hawkish Fed, is that near record equities, still very low bond
yields, and a USD well off its highs, leave plenty of cushion before a
market sell-off tightens financial conditions much more than they would
like. Of course there is an unpredictability to the market response that
is undesirable, but very likely manageable. As for global risks, Rosengren just noted
“… while it is important to acknowledge the presence of global risks,
market indicators have so far provided little evidence of outsized
risks.” This fits with the idea that after some sell-off, risky assets
can handle a hike in September as long as they believe the Fed is still
in a very gradual tightening mode.
RBC’s Tom Porcelli and team argue that the case for a rate hike is getting weaker, not stronger:
The ISM non-manufacturing index printed its worst headline
since this metric was coming out of the depths of the recession. We
said in the wake of the weak manufacturing report that the Fed would
give little weight to that measure—don’t forget the committee was hiking
rates back in Dec 2015 with an initial ISM manufacturing read of 48.2
(the cycle low) in hand. The difference is we now have this much more
important component of economic activity (non-manufacturing accounts for
86% of the private economy) also flirting with contraction territory.
While we will certainly not give this one report more attention than it
deserves in terms of dictating our broad economic outlook, this is not a
level of ISM non-manufacturing that typically bodes well for the cycle.
But at a minimum, for a Fed that seems decidedly on the fence about
hiking rates in September, it would seem to feed the dove case for
holding off....MORE
About the only thing that wasn't lowing were cattle.
