S&P 500 falls 0.25% as Warsh reprices September Fed hike odds

The S&P 500 fell 0.25% to 7,711.76 after Warsh's Jackson Hole speech lifted September rate-hike odds to 58% from 35%.

"The VIX is low because a Fed that is vigilant on inflation without having to hike aggressively is seen as positive for the economy to bring inflation down, bolstering the bull case for stocks," Ben Emons, managing director at Highline Asset Management, said.

Consumer discretionary gained 1.69% and communication services rose 1.56%, while technology lost 1.29% and industrials fell 0.96%. The 2-year Treasury yield jumped more than 10 basis points to about 4.35%, the dollar index rose 0.4% to 99.57, and the Cboe Volatility Index touched 14.1, its lowest reading of the year.

Every employment and inflation report between now and the Sept. 15-16 Federal Open Market Committee meeting either builds on what Warsh started Friday or unwinds it. August payrolls and August CPI are the two prints that determine whether the 58% probability becomes a done deal.

Warsh Told Jackson Hole Rates Are Not Restrictive Enough

Warsh said the Fed still has work to do unless inflation moves toward 2% convincingly. Financial conditions do not look restrictive, he said, and the market heard that as confirmation the pause may already be over. Fed funds futures started repricing before he finished speaking.

September hike odds had been sitting near 35% heading into the speech. They came out the other side at roughly 58%, according to CME Group's FedWatch tool. The 2-year yield jumped more than 10 basis points to about 4.35%, its highest level in a month, while the 30-year held flat at 5.19%. That bear flattener shows traders pricing in short-term Fed tightening while betting it will keep long-term inflation in check.

Consumer Discretionary Had the Best Day on the Board

Amazon climbed 3.97% after Evercore ISI raised its price target to $355 from $315, citing survey evidence that Alexa AI tools are driving purchases inside the retail business. Domino's Pizza ran 5.40%, Lululemon advanced 5.05%, Expedia picked up 3.30%, and eBay added 3.59%. The buying was spread across restaurants, retail, travel and media, and it held all afternoon.

Energy added 0.59% as SLB gained 4.22%. Communication services rose 1.56% as Alphabet climbed 1.7% and Apple picked up 1.6%. Financials added 0.34% — a more aggressive Fed is not a recession call, and banks can work with higher rates.

Technology took the worst of it. Marvell dropped 10.28% after its guidance raised questions about the timing of AI revenue tied to Google. Nvidia fell 4.6% one session after jumping nearly 9% on its earnings beat. Lumentum lost 6.39%, Lam Research gave back 5.24%, and Coherent fell 5.48%. Industrials lost 0.96% with Comfort Systems USA down 5.96%. PayPal was the single worst name in the index, down 12.71% after Advent and Stripe walked away from deal talks.

The index settled on the weak side of a short-term pivot at 7,727.86. A sustained move above it could put the index in position to challenge the record high at 7,816.70. Below the pivot, the swing bottom at 7,639.01 and the 50-day moving average at 7,562.87 are the next levels traders will test.

Friday showed the S&P 500 has places to go when the rate trade hits technology. Consumer names, energy stocks and the megacap anchors absorbed selling that would have broken a narrower index. The question next week is whether new buyers show up to widen that support or whether the same handful of names have to keep doing all the work.

This article is for informational purposes only and does not constitute investment advice.