Dow drops more than 1,000 points as inflation burns hard

US stocks fell on Tuesday as Wall Street suddenly realized that inflation is not slowing as much as hoped.

Hotter than expected Inflation Report Send a jingle across Wall Street and markets around the world. The Consumer Price Index has risen 8.3% over the past 12 months, as rising food, shelter and Medicare prices offset lower gasoline prices.

While last month’s increase was less than July’s 8.5% jump, it was above economists’ expectations of 8.1%, showing prices remain uncomfortably high.

In response to the report, the S&P 500 fell on Tuesday, dropping 176 points to 3,935, or 4.3%, threatening to lose its four-day winning streak. The Dow Jones Industrial Average lost 1,256 points, or 3.9%, and the Nasdaq Composite fell 5.2%. The names of the big tech companies saw a big drop, and all 11 sectors in the S&P 500 fell.

The drop was the worst day for the S&P 500 and Nasdaq since June 2020, according to FactSet.

The disappointing data means that traders are preparing for the Federal Reserve to eventually raise interest rates higher than expected to combat inflation, with all the risks to the economy, analysts said.

“Right now, the journey is not so much a concern as the destination,” said Brian Jacobsen, senior investment analyst at Allspring Global Investments. “If the Fed wants to go up and hold, the big question is what the level is.”

Almost every Wall Street on the day came in believing that the Fed would raise its key short-term interest rate by a large three-quarters of a percentage point at its meeting next week, with even smaller rate hikes in the following months. The thinking was that a slowdown in inflation would allow the Fed to vary the size of interest rate increases through the end of this year, potentially holding them until early 2023.

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Tuesday’s report dashed some of those hopes, with ZipRecruiter’s chief economist Sinem Popper noting in an email that the Fed “may have to raise rates for much longer to tame inflation, with more pain for the housing and labor market along the way.” “

Many of the data points in the inflation report were worse than economists had expected, including some that the Federal Reserve pays special attention to, such as inflation outside of food and energy prices. Markets honed a 0.6% rise in such prices during August from July, twice what economists had expected.

The Federal Reserve to maintain an aggressive approach to fighting inflation


“This indicates that inflation expectations may become ingrained,” said Garji Chaudhry, head of investment strategy at iShares.

“The market was settling into a ‘peak’ mentality — peak inflation and peak money rate expectations, and now investors are wondering whether both numbers shouldn’t continue to bullish,” Adam Crisavoli, equity analyst, head of Vital Knowledge, in a note to investors.

Interest rates are set to rise further

The inflation numbers were so much worse than expected that traders now see a one in five chance of a full percentage point rate hike by the Federal Reserve next week. That would be four times the size of the usual move, and no one in the futures market had expected such a rally the day before.

Traders now see a better than 60% probability that the Fed will withdraw the fed funds rate to a range of 4.25% to 4.50% by March. The day before, they saw less than a 17% chance of such a high rate, according to CME Group.

The Fed has already raised its benchmark interest rate four times this year, with the last two increases by three-quarters of a percentage point. The federal funds rate is currently between 2.25% and 2.50%.

Higher prices hurt the economy by making it more expensive to buy a house, car, or anything else purchased on credit. Mortgage rates have already reached their highest level since 2008, causing pain housing industry. The hope is that the Fed can walk the tightrope of slowing the economy enough to eliminate high inflation, but not so much that it creates a painful recession.

MoneyWatch: How inflation can affect people’s insurance as prices keep rising


Meanwhile, higher rates are also putting pressure on the prices of stocks, bonds and other investments. Investments seen as the most expensive or risky have been hit the hardest by rising interest rates, with Bitcoin dropping 5.3%. Bond prices also fell sharply, driving up their yields.

In the stock market, all but a dozen stocks in the S&P 500 fell. Technology and other high-growth companies have fallen more than the rest of the market because they are seen as the most vulnerable to rising rates.

“Investor sentiment remained severely negative in September, reflecting higher risk aversion and the second-lowest forecast for near-term market performance over the past two years,” Chris Williamson, executive director at S&P Global Market Intelligence, said in a report.

Apple, Microsoft and Amazon all fell more than 3.3% and were the heaviest weightlifters in the market. The telecom services sector, which includes the parent company of Google and other Internet and media companies, fell 3.9%, recording the largest loss among the 11 sectors that make up the Standard & Poor’s 500 Index.

“The vast majority of investors surveyed expect next year to be a stagnation accompanied by rising inflation, which means that the global economy and tight monetary policy are set to act as persistent significant drags on market performance and corporate earnings,” Williamson said.

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