The inflation nightmare continues to plague Wall Street. The CPI consumer price index for the month of September was released before the start of the trading day. The acceleration of year-on-year core inflation, in particular, has led markets to fear new anti-inflation rate hikes from Jerome Powell’s Federal Reserve. The sell offs hit the US stock market. At about 4 pm Italian time, the Dow Jones however reduces the initial losses and, after having lost more than 500 points, moves back by about 350 points (-1.17%), to about 28,868 points; the S&P 500 dropped 1.43% to 3,525, while the Nasdaq Composite dropped 2% to 10,215. With a loss of more than -3% at the start of the session, the Nasdaq slipped today lower than the record tested in November 2021 by more than 37%. The S&P 500, also in the first few minutes of trading, fell below the 3,500 point threshold for the first time since November 2020.
After the release of the inflation data, the markets have in fact priced the arrival of a fourth monetary tightening by the Fed of 75 basis points, in the next meeting on 1-2 November, with a probability of 98%. The probability of a fifth consecutive rate hike of 75 basis points also increased to 62%.
As a result, speculations on the terminal rate are rekindling in the markets: traders are now betting on a roundup of monetary tightening by Powell & Co that will bring rates to approach 5%, before the central bank puts an end to the hikes, in the spring of 2023.
Expectations are on fed funds rates up to 4.9% by next April, compared to 4.65% priced yesterday.
Returning to today’s figure, in September the US consumer price index rose 0.4% on a monthly basis, double the expectations, accelerating the pace from the previous + 0.1%. The core component – net of the prices of energy and food goods – jumped by 0.6% on a monthly basis, over the estimated + 0.5% and as in September.
On an annual basis, inflation measured by the CPI index jumped by 8.2%, slowing the pace compared to the 8.5% growth of the previous month, but climbing at a rate higher than the expected + 8.1%.
Core inflation also accelerated its pace, from + 6.3% in August to + 6.5%, in line with expectations. It is the 28th consecutive month that the core CPI index has risen, now reaching a record since August 1982.
The jump in core inflation immediately triggered Treasury rates and the US dollar to rise: the boom in the greenback led the euro to lose more than half a percentage point, to 0.9652. The dollar strengthened against the yen by 0.44% to JPY 147.58. Treasuries under pressure, with two-year US government bond rates immediately jumping 19 basis points to 4.48%, then flying further above the 4.5% threshold. The 4.5% threshold was breached for the first time since 2007. 10-year Treasury rates are once again above the 4% threshold.
The trend in the consumer price index confirms the fears of investors (and consumers) related to the flare-up in prices, fueling speculation on interest rate hikes by the Fed which is still very aggressive.
On the other hand, the numbers show that, despite the maxi monetary tightening by the American central bank led by Jerome Powell, inflation is not flaring up. The Federal Reserve could therefore lean towards even stronger rate hikes.
Yesterday the minutes relating to the last meeting of the FOMC, the monetary policy arm of the US central bank, relating to last September 21st, when the main reference rates were raised by 75 basis points, were released, as expected.
The American central bank has brought US rates into the range of 3% to 3.25%, a record since 2008, making the third consecutive tightening of 75 basis points.
The minutes revealed that the Fed intends to continue on the path of rate hikes, until the problem of runaway inflation in the United States is resolved.
“The participants (in the FOMC) – read the Fed minutes – believed that the Commission should move towards, and then maintain, a more restrictive (monetary) policy approach, in order to center the mandate of the Commission, aimed at promoting maximum employment and price stability “.
The minutes from the Fed continue, noting that inflation “shows few signs of weakening so far”, a factor that has led FOMC officials to “revise upwards the outlook on the monetary tightening necessary to achieve the Commission’s objectives”.
Inflation, according to the minutes, remained unacceptable high, well above the Fed’s long-term target of 2%.
“Participants noted that recent inflation figures have generally exceeded expectations and that inflation is falling slower than anticipated,” the minutes read again.