Stocks Tumble, Yields Spike on Inflation Shock: Markets Wrap

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(Bloomberg) — US stocks plunged and Treasury yields spiked higher after consumer prices rose faster than expected last month, as traders boosted bets the Federal Reserve will raise interest rates sharply next week.

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The S&P 500 tumbled at the open, snapping a four-day rally. The two-year Treasury yield, the most sensitive to policy changes, jumped about 16 basis points. Swaps traders are now pricing in a rate increase of three-quarters of a percentage point. A gauge of the dollar reversed a decline to trade 0.9% higher.

The consumer price index increased 0.1% from July, after no change in the prior month, Labor Department data showed Tuesday. From a year earlier, prices climbed 8.3%, a slight deceleration but still more than the median estimate of 8.1%. So-called core CPI, which strips out the more volatile food and energy components, advanced 0.6% from July and 6.3% from a year ago, also topping forecasts.

“The recent bounce in equities looked incredibly ill-judged and premature,” said James Athey, investment director at Abrdn. “That CPI number is very strong relative to consensus and will not be what the Fed wanted to see at all. The chance of the pace of hikes slowing after September has receded somewhat as a result of this data.”

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“Headline inflation has peaked but, in a clear sign that the need to continue hiking rates is undiminished, core CPI is once again on the rise, confirming the very sticky nature of the US inflation problem,” Seema Shah, chief global strategist at Principal Global Investors, said in a note. “In fact, 70% of the CPI basket is seeing an annualized price rise of more than 4% month-on-month. Until the Fed can tame that beast, there is simply no room for a discussion on pivots or pauses.”

“The CPI report was an unequivocal negative for equity markets,” wrote Matt Peron, director of research at Janus Henderson Investors. “The hotter than expected report means we will get continued pressure from Fed policy via rate hikes. It also pushes back any “Fed pivot” that the markets were hopeful for in the near term.”

The latest inflation data came amid debate about the outlook for the global economy and how that will affect markets. Stocks have rallied in recent days, with the S&P 500 completing its biggest four-day surge since June on Monday. JPMorgan Chase & Co. said a soft landing is becoming the more likely scenario for the global economy, but Bank of America Corp.’s latest survey showed the number of investors expecting a recession has reached the highest since May 2020.

The Stoxx Europe 600 index reversed an advance, with real estate and retail shares leading the decline. The rallyu in crude oil stalled as the dollar’s ascent offset global demand concerns. Bitcoin fell below $22,000.

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Here are some key events to watch this week:

UK CPI, Wednesday

US PPI, Wednesday

US business inventories, empire manufacturing, retail sales, initial jobless claims, industrial production, Thursday

China home sales, retail sales, industrial production, fixed assets, surveyed jobless rate, Friday

Euro area CPI, Friday

US University of Michigan consumer sentiment, Friday

Some of the main moves in markets:

Stocks

The S&P 500 fell 2% as of 9:31 a.m. New York time

The Nasdaq 100 fell 2.7%

The Dow Jones Industrial Average fell 1.6%

The Stoxx Europe 600 fell 1.1%

The MSCI World index fell 1.7%

Currencies

The Bloomberg Dollar Spot Index rose 0.8%

The euro fell 0.9% to $1.0026

The British pound fell 1.1% to $1.1555

The Japanese yen fell 1% to 144.27 per dollar

Bonds

The yield on 10-year Treasuries advanced eight basis points to 3.43%

Germany’s 10-year yield advanced eight basis points to 1.73%

Britain’s 10-year yield advanced six basis points to 3.14%

Commodities

West Texas Intermediate crude rose 0.5% to $88.21 a barrel

Gold futures fell 1.8% to $1,709.50 an ounce

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