UPDATE: Deflation with August Stock Round-Up?

By Staff Reporters

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Inflation is starting to “drop like a rock” rather than a feather, leading to outright deflation in some areas of the economy, Fundstrat’s Tom Lee said in a note. A slowdown in rising inflation would be welcome news to investors given that the stock market has sold off 5% since Fed Chair Jerome Powell’s hawkish speech at Jackson Hole last week. Powell reiterated the Fed’s resolve to tame inflation by being aggressive with interest rate hikes and a reduction to its $9 trillion balance sheet. The market currently expects another outsized 75 basis point rate hike from the Fed at its FOMC meeting in late September. If inflation cools and is less “sticky” than most expect, it could change the Fed’s current interest rate hike trajectory, ultimately leading to a faster pivot towards a pause in rate hikes. That would be a boon for risk assets, which have been stymied in recent months by fast rising interest rates.

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U.S. stocks ended the month with their fourth straight daily decline cementing the weakest August performance in seven years as worries about aggressive interest rate hikes from the Federal Reserve persist. Adding to pressure were declines in the technology sector, and more specifically chip-makers, after soft forecasts from Seagate and HP Inc. The three main indexes suffered their biggest monthly percentage declines in August since 2015. After hitting a four-month high in mid-August, the S&P 500 has stumbled in recent weeks, dropping more than 7% through the close and falling through several closely watched technical support levels.

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