Fed chair Powell’s cautious tone sends stocks lower

Tuesday appeared to deliver somewhat of a reality check for markets as Fed Chairman Jerome Powell echoed more of a ‘cautious vibe’ in his remarks in Providence, Rhode Island. This sent major US equity indices southbound from record pinnacles, with the S&P 500 notching up a bearish outside day and the Dow Jones pencilling in a bearish shooting star pattern.

Powell directed some of the spotlight to the challenging balancing act Fed officials face, emphasising that ‘near-term risks to inflation are tilted to the upside and risks to employment are tilted to the downside – a challenging situation’. Perhaps aiding the drop in Stocks was Powell's note that ‘by many measures, equity prices are fairly highly valued’. Powell's cautious stance also comes as the Fed navigates what he described as having ‘no risk-free path’ forward.

Despite the Fed lowering its target rate by 25 bps to 4.00% - 4.25% last week, clarity remains opaque among Fed officials, with Powell bang in the middle between hawks and doves right now. For example, Vice Chair for Supervision of the Board of Governors, Michelle Bowman, noted that the labour market is front and centre and must act more decisively, while newly-appointed Fed Governor Stephen Miran is advocating for multiple 50-bp cuts. We also had Fed Bank of Atlanta President Raphael Bostic hitting the airwaves, citing upside inflation risks and highlighting caution.

The Fed Chair’s measured comments yesterday paves the way for Friday’s August US PCE inflation numbers. As shown on the LSEG calendar below, the YY headline print is expected to tick higher by 2.7% (from 2.6% in July), while the YY core release is forecast to remain steady at 2.9%.

The calendar is somewhat thin today folks; therefore, focus will likely centre on whether yesterday's pullback represents a healthy correction or the beginning of a broader reassessment of risk asset prices. As of writing, US equity futures are moderately bid, with European equity futures also pretty much flat.

Gold penned in another record high to US$3,777 yesterday – its 37th all-time high this year – underpinned by expected Fed easing as well as soft USD demand. I am still closely watching daily support between US$3,585 and US$3,643 should a temporary pullback unfold.

Aussie inflation surprises to the upside; sends the AUD northbound

Overnight, we also saw August CPI inflation figures drop out of Australia, which showed a 3.0% rise YY, from 2.8% in July, and above the 2.9% consensus.

Reinforced largely on the back of housing prices, the inflation data reinforces the RBA’s cautious stance, and triggered a bid in the AUD against G10 peers, as well as shorter-dated government bond yields as traders push back on near-term rate cuts. Markets are potentially looking at December for a 25-bp cut, with February 2026 fully priced in right now.