Market Weakness Continues Following Powell's Warning Of Interest Rate 'Pain': Catalysts To Watch This Week

The SPDR S&P 500 ETF Trust SPY traded lower by another 0.8% on Monday morning after a 3.4% plunge Friday in the wake of bearish commentary from Federal Reserve Chair Jerome Powell at the Jackson Hole Economic Symposium.

Investors were hopeful that strong labor data and indications that inflation may have finally peaked in July would be good enough for the Fed to dial back its aggressive approach to monetary policy tightening at its upcoming September meeting, but Powell's comments on Friday suggest the Fed will continue full steam ahead in fighting inflation.

Pain Ahead: Powell said the path back to the Fed's target 2% inflation range may be painful for investors.

"While higher interest rates, slower growth and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses," he said.

"The historical record cautions strongly against prematurely loosening policy.”

Related Link: US Jobs Growth Is Robust, But Labor Productivity Is Tanking

As of Monday morning, the bond market was pricing in a 64.5% chance of a third consecutive 0.75% interest rate hike from the Fed in September, up from just a 28% chance one month ago, according to CME Group.

What To Watch: On Monday, DataTrek Research co-founder Nicholas Colas said the length of time interest rates stay above the "neutral" 2.5% level is just as important as how high they rise.

The S&P 500 has been very sensitive to two-year U.S. Treasury yields throughout 2022 because these yields reflect expected monetary policy over the next 24 months, Colas said. 

Related Link: 3 Reasons The Summer Stock Market Rally Has Stalled

He expects two-year Treasury yields will stabilize this week at levels of around 3.43% rather than break out above June highs of 3.45%.

"If that happens, U.S. equity markets should be able to find their footing. If it does not, we are concerned stocks will see meaningful further downside volatility," Colas said.

The Week Ahead: Looking ahead, investors will get more important economic updates this week on Tuesday when Fed Vice Chair Lael Brainard delivers her own speech and on Friday when the U.S. Labor Department releases its August jobs report.

A strong jobs number and more hawkish commentary from Brainard could up the chances of another 0.75% September rate hike even further.

Benzinga's Take: The S&P 500's August stock market correction may stabilize once expectations for the Fed's September meeting are appropriately reset. Yet interest rates will almost certainly continue to rise through at least the end of the year, a dynamic that could make it very difficult for the S&P 500 to deliver meaningful upside for the foreseeable future.