Wall Street Slides as Dovish-leaning Fed Minutes Fail to Lift Sentiment

Key Points

• Wall Street fell on Wednesday as investors digest dovish-leaning Fed minutes and strong core US retail sales.
• The S&P 500 dropped 0.7% and the Nasdaq 100 1.2%.
• A paring of bets on a larger 75 bps rate hike from the Fed next month failed to lift sentiment.

Wall Street Slides as Investors Digest Dovish-leaning Fed Minutes, Strong Core Retail Sales

Major US indices fell on Wednesday, with rate-sensitive big tech/growth names leading the decline, but most other sectors also suffering despite stronger than expected growth in Core US Retail Sales in July and a slightly more dovish lean to the minutes of the Fed’s July meeting that investors had been expecting. The stronger than expected core retail sales figures weighed on equities in pre-market trade on Wednesday amid worries that it would send a signal of economic strength that might encourage the Fed to tighten policy at a faster pace.

While these worries were allayed somewhat in wake of the minutes later in the US session and stocks did see a momentary recovery from lows, profit-taking across the US equity space equity prices pressured into the close. The S&P 500 ended the session 0.7% lower, the Nasdaq 100 1.2% lower and the Dow Jones Industrial Average 0.5% lower. However, all three remain within a stone’s throw of multi-month highs printed on Tuesday, and all three are still 3-4% higher on the month.

Key themes in US equity markets remain 1) whether or not inflation has peaked and will now make progress back to the Fed’s 2.0% target in 2023 (the jury remains out), 2) whether the US economy can avoid a recession and 3) how much the Fed will tighten interest rates in the coming quarters into 2023. July economic data released this month has indicated that inflation has probably peaked and growth was robust in early Q3, which, alongside generally strong earnings, has supported stock prices.

Money markets were last pricing a 63.5% chance that the Fed lifts interest rates by 50 bps versus a 36.5% chance that they go with a 75 bps rate hike at the September meeting. These odds have swung significantly in recent days and are likely to remain volatile as the trickle of August economic data begins coming out early next month in the lead-up to the Fed’s 21 September meeting. Equity bulls would prefer the smaller rate hike, as a slower approach to rate hikes reduces downside risks to the economy.

Retail Stocks Shrug Off Weak Target Earnings, Energy the Only Sector to Gain

Major retail names like Walmart and Home Depot, both of which were lifted on Tuesday after strong earnings, were resilient to weaker than expected Q2 figures from fellow large US retailer Target. The worst performing S&P 500 GICS equity sectors were Communications Services (-1.8%) and Materials (-1.4%). All other sectors were also in the red apart from Energy, which posted a 0.8% gain amid a very modest pick up from six-month lows in the price of US oil.