Stock market: Turbulence ahead

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There has sure been a lot of choppy trading since the beginning of September, with the bears taking the bulls by the horns in an intense fight over market direction. Traders continue to assess market data – before the FOMC meeting at the end of the month – to see how far the central bank will go in its battle against inflation. The more positive the economic figures, the less the Fed will have to worry its aggressive hiking cycle will trigger a downturn… or so the thinking goes.

The latest: The S&P 500, along with the major indices, fell Tuesday for its seventh consecutive day of losses, marking the longest losing streak since November 2016. It followed an ISM survey that showed the U.S. services industry picking up for the second straight month in August due to increases in business activity, new orders and employment. The focus now turns to Fed Chair Jerome Powell’s speech tomorrow, after the central bank telegraphed that it would be extremely data dependent given a road ahead that’ll “bring some pain to households and businesses.”

Traders now see a 70% chance of a third 75-basis-point move in September, up from 57% a week ago, according to the CME Group’s FedWatch tool that measures pricing in the fed funds futures markets. 

Commentary: “The Fed will be surprised by the growth damage caused by its tightening, in our view,” wrote analysts at Blackrock. “When the Fed sees this pain, we think it will stop raising rates. It will be too late to avoid a contraction in economic activity by then, we think, but the decrease won’t be deep enough to bring PCE inflation down to the Fed’s target of 2%… That’s a big deal. We think getting inflation back to central bank targets means crushing demand with a recession. That’s bad news for risk assets in the near term.”