US stocks plummeted on Tuesday due to Wall Street’s sudden realization that inflation is not slowing as much as hoped.
A hotter than expectedsent a thud across Wall Street and markets around the world. The consumer price index has risen 8.3% over the past 12 months as rising prices for food, accommodation and medical care offset the drop in gasoline prices.
While last month’s increase was less than the 8.5% jump in July, it was higher than the 8.1% expected by economists, showing that prices remain uncomfortable.
In reaction to the report, the S&P 500 plunged Tuesday, dropping 176 points to 3,935, or 4.3%, threatening to deliver a four-day streak of straight wins. The Dow Jones Industrial Average lost 1,256 points, or 3.9%, and the Nasdaq Composite was down 5.2%. The big names in technology have seen steep declines and all 11 sectors of the S&P 500 have fallen.
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 bracing for the Federal Reserve to raise interest rates even higher than expected to fight inflation, with all the risks to the economy that this entails, analysts said.
“Right now, it’s not the journey that worries as much as the destination,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments. “If the Fed wants to rise and maintain, the big question is at what level.”
Most of Wall Street came early in the day thinking the Fed would raise its key short-term rate by a whopping three-quarters of a percentage point at next week’s meeting, with smaller rate hikes in the following months. The idea was that a slowdown in inflation would allow the Fed to reduce the size of its rate hikes until the end of this year and then remain stable until early 2023.
Tuesday’s report disappointed some of those hopes, with ZipRecruiter chief economist Sinem Buber noting in an email that the Fed “may have to hold rates higher longer to tame inflation, with greater pain for the housing market and the job market along the way. ”
Much of the data within the inflation report was worse than economists expected, including some that the Fed pays particular attention to, such as inflation outside food and energy prices. Markets honed a 0.6% rise in those prices in August from July, double what economists expected.
“This suggests that inflation expectations may become entrenched,” said Gargi Chaudhuri, iShares’ head of investment strategy.
“The market had stabilized into a ‘peak’ mentality: inflation peak and fund rate expectations high, and now investors are wondering if both numbers shouldn’t run higher,” equity analyst Adam Crisafulli, lead of Vital Knowledge, reads a note to investors.
Interest rates set to rise further
Inflation data was much worse than expected that traders now see a one in five chance for a full percentage point rate hike by the Fed next week. It would quadruple the size of the usual move and no one in the futures market was predicting such an increase the day before.
Traders now see a greater than 60% chance that the Fed will bring its federal funds rate down to a range of 4.25% to 4.50% by March. A day earlier, according to CME Group, they saw less than a 17% chance of such a high rate.
The Fed has already raised the benchmark interest rate four times this year, with the last two hikes of three-quarters of a percentage point. The federal funds rate is currently between 2.25% and 2.50%.
Higher rates damage the economy by making it more expensive to buy a home, car, or anything else bought on credit. Mortgage rates have already reached their highest level since 2008, creating pain for. The hope is that the Fed can complete the tightrope walk to slow the economy enough to stifle high inflation, but not so much as to create a painful recession.
Meanwhile, higher rates are also putting pressure on the prices of stocks, bonds and other investments. Investments seen as the most expensive or riskiest are those most affected by the highest rates, and bitcoin plunged 5.3%. Bond prices also fell sharply, pushing their yields up.
In the stock market, all but a dozen stocks in the S&P 500 fell. Tech and other high-growth companies have fallen more than the rest of the market because they are considered the most at risk due to higher rates.
“Investor sentiment remains strongly negative in September, reflecting heightened risk aversion and the second lowest short-term market performance expectation seen in the past two years,” said Chris Williamson, executive director of S&P in a report. Global Market Intelligence.
Apple, Microsoft and Amazon all fell more than 3.3% and were the heaviest weights on the market. The communications services sector, which includes Google’s parent company and other internet and media companies, fell 3.9% on the largest loss among the 11 sectors that make up the S&P 500 index.
“The overwhelming majority of investors surveyed expect that next year will be characterized by a recession combined with high inflation, which means that the global economy and tightening monetary policy are set to act as a major brake on market performance. and corporate earnings, ”Williamson said.