US stocks fell in afternoon trading as markets continued to gauge the magnitude of rate cuts by the Federal Reserve this year.
The S&P 500 was down 0.7% and the Dow lost nearly 200 points, while the Nasdaq 100 dropped 1.3% due to the larger impact of losses in the tech sector on the index.
Initial jobless claims rose slightly more than expected halfway through August, magnifying growing concerns of a moderating labour market in the US following the 818,000 downward revision to nonfarm payrolls for the year ending in March.
S&P PMI showed that the US private economy expanded sharply in August, albeit growth was solely carried by service providers.
Nvidia shares fell nearly 2% ahead of their earnings report next week.
We'll hear from Jerome Powell at the annual economic symposium in Jackson Hole. As we discussed earlier this week, this event has historically served as a platform for central bankers to communicate important signals regarding policy adjustments.
This will be the first time we've heard from the Fed Chair since the July 31 post-FOMC press conference.
Let's revisit the important takeaways from that meeting …
In that July meeting, the Fed held rates unchanged for the twelfth consecutive month.Â
But in the press conference, Jerome Powell made a good case (as he has in the past) for why they should have cut, which includes this very significant statement: Â
"The job is not done on inflation, but nonetheless, we can afford to begin to dial back restriction in our policy rate."
He also admitted that they have "a lot of room to respond" to a shock or weakness in the economy (i.e. plenty of rate cut ammunition, given the high level of the policy rate).
Now, heading into that meeting, the market was pricing in a coin flips chance between 50 and 75 basis points of cuts by year end.
We've since seen what should meet the Fed's definition of "cracks" in the job market, which has been their stated condition to "react" (in Jerome Powell's words) with a policy response.
With that, heading into the day’s speech, the market is now pricing in the likelihood of 100 basis points of cuts by year end — with a small chance of as many as 150 basis points.
So, just in a few weeks, the pendulum has swung back in the direction of aggressive rate cuts by year end.
That said, these expectations assume the Fed will indeed react to "cracks," which implies that they will take the signal of weakness in the labour market to proactively stop a deepening of the crack that would lead to more significant economic damage (like sharper job losses, declines in consumer spending, cutbacks on investment, etc.).
The problem: History suggests the Fed is more comfortable doing clean up and rescue, than proactive fine tuning. Â
This is why, during their respective tenures as Fed Chair, both Bernanke and Yellen said that economic expansions don't die of old age (historically), the Fed tends to murder them.
