Markets: News  

By Joseph Adinolfi and William Watts

Inflation reading stokes expectations Fed will remain aggressive in hiking interest rates

The Dow Jones Industrial Average slumped more than 1,300 points in the final hour of trading Tuesday as losses accelerated led by technology stocks while bond yields soared, leaving all three equity benchmarks on track for their worst session since at least June following an unexpected uptick in August consumer-price inflation.

What's happening

Popular, index-tracking exchange-traded funds, including the SPDR S&P 500 ETF Trust (SPY) and the SPDR Dow Jones Industrial Average Trust ETF (DIA) were down sharply in line with their benchmarks. The tech-concentrated Nasdaq-100 and the Invesco QQQ Trust ETF (QQQ) were down 4%.

All three indexes are on track for their biggest percentage-point declines since June 11.

What's driving markets

The August consumer-price index, or CPI, rose 0.1% in August, though the year-over-year rate slowed to 8.3% from 8.5% in July. Economists had looked for a monthly fall of 0.1% that would bring the year-over-year rate down to 8%.

However, the core rate, which strips out volatile food and energy prices, rose 0.6%, for a year-over-year rise of 6.3%, outstripping expectations for a 0.3% monthly rise and a 6% year-over-year pace.

See: U.S. inflation roars back in August, CPI shows, despite falling gas prices

The notion that inflation may be stickier than economists had expected -- which in turn could force the Federal Reserve to maintain its aggressive tightening of monetary policy for longer -- was enough to send U.S. stocks into a tailspin as volatility surged, with the Cboe Volatility Index, otherwise known as "the VIX", rising more than 8% to 25.9 in afternoon trade.

"Markets were jolted by a nasty CPI print this morning and are responding in kind", said Cliff Hodge, Chief Investment Officer for Cornerstone Wealth in Charlotte, North Carolina. "Misses on both headline and core are disappointing as this bout of inflation proves to be anything but 'transitory'. Unfortunately for markets this print will reinforce the need for the Fed to remain aggressive and will likely keep a lid on risk assets over the foreseeable future."

The data is seen cementing expectations the Federal Reserve will boost the fed-funds rate by another outsize 75 basis points when it meets next week, with fed-funds futures penciling in the outside prospect of a 100 basis point hike. Treasury yields jumped, with the rate on the policy-sensitive 2-year note BX:TMUBMUSD02Y surging more 19 basis points to trade at 3.758%, near a 15-year high, and further inverting the yield curve -- a phenomenon seen as a reliable recession indicator.

"Today's inflation print is not the data the Fed wanted to see the week before theymake a significant decision on the policy rate," said Charlie Ripley, senior investment strategist for Allianz Investment Management in Minneapolis. "With core inflation rising twice as fast as economist's expectations and the annualized inflation rate, stripping out food and energy, rising to 6.3%, the Fed clearly has their work cut out for them. "

"Overall, inflation readings remain unacceptably high for policy makers. Coupled with a labor market that is still strong, the data seal the deal for another aggressive, 75-basis point, rate hike next week," said Rubeela Farooqi, chief U.S. economist at High Frequency Economics, in a note.

See:Any lingering doubt that Fed will go big with next rate move has now vanished

The U.S. dollar also strengthened as investors sought shelter in the safety of the greenback, while higher yields also made the buck more attractive. The ICE U.S. Dollar Index , a gauge of the greenback's strength compared to a basket of its main rivals, was up 1.4% at 109.83.

Companies in focus

--Steve Goldstein contributed to this article.

Hear from Ray Dalio at the Best New Ideas in Money Festival on Sept. 21 and Sept. 22 in New York. The hedge-fund pioneer has strong views on where the economy is headed.

-Joseph Adinolfi

(END) Dow Jones Newswires

September 13, 2022 15:45 ET (19:45 GMT)

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