Thursday’s report revealed the scale of price pressures roiling the US economy with overall consumer-price inflation staying above 8% for a seventh straight month. Consumer prices increased 8.2% from a year earlier, down from an 8.3% rise in August and a four-decade high of 9.1% in June, as climbing food and rent costs again offset falling gasoline prices, according to the Labor Department's Consumer Price Index. On a monthly basis, consumer prices edged up a larger-than-expected 0.4% after a 0.1% increase in August. Core prices, which exclude volatile food and energy items and generally provide a better measure of longer-term trends, increased 0.6% from August following a similar rise the previous month. That pushed the annual increase from 6.3% to 6.6%, a new 40-year high.
The stock market has become in chaos after the release of the data. The S&P 500 wiped out a 2.4% loss, marking the first time since July that it reversed a decline of 2%, and closed a whopping 2.6% higher. The initial rush to sell, followed by a dash to buy. Never before has the market experienced such extreme readings in both directions in one day, according to Bloomberg data going back to 1990. Meanwhile, the Dow Jones Industrial Average surged about 1,400 points from the day’s low, then U.S. stocks erased early gains Friday, tumbling in the latest U-turn for equities following a volatile week of swings in both directions. The S&P 500 shed more than 2% on the day
The composition of the inflation reading is perhaps even more worrisome than the overall number. Increases in the shelter and medical care indices, the stickiest segments of the CPI basket, confirm that price pressures are extremely stubborn and will not go down without a Fed fight. Looking at the components, what is most worrying is the big jump in services. Service inflation is the most sticky. This is where both shelter prices and wages reign supreme.
Given the latest CPI report, “any continued pick-up in energy prices can get us to a new high” in headline inflation, said Steve Chiavarone, senior portfolio manager at Federated Hermes. That “could very well spook markets as it pushes back any expectation of peak inflation, peak Fed hawkishness and could force the market to contemplate a terminal fed funds rate above 5%. All that would raise the risks of more bond pain, more equity pain, and a greater risk of a financial accident.”
“We’re probably near a peak, but that being said, I don’t think we’re going to have a speedy return to lower numbers in part because” of the persistence of rental inflation, said Michael Feroli, chief US economist at JPMorgan Chase & Co.
The US central bank is raising interest rates at the most rapid pace since the 1980s to curb inflation at 40-year highs. Prior to the inflation data, OIS markets were leaning toward the central bank cooling the pace of tightening to a 50 basis point move in December. At Wednesday’s close, swaps priced in around 130 basis points of hikes over the remaining of the year, which is equivalent to 55 basis points for December, now Investors now see a solid chance the Fed will raise rates 75 basis points in both November and December after data Thursday showed core consumer prices rising more than anticipated in September. The chances of a recession have risen to 60%, according to the latest Bloomberg monthly survey of economists.
Federal Reserve Bank of San Francisco President Mary Daly said she expects the central bank to keep raising its benchmark rate in coming months and holding it there following fresh inflation reading that she called “very disappointing.” Daly, speaking Friday in a video interview with Yahoo! Finance, said she’s “very supportive” of continuing to increase rates to restrictive levels. Daly and other Fed officials are reacting to the latest bout of bad US inflation news, which showed a core measure of prices rising the most in 40 years. Some economists expect central bankers to once again raise their outlook for how high they’ll have to lift interest rates.
The dollar is likely to keep rallying until the current slowdown in the global economy is over and growth starts to accelerate again, according to Citigroup Global Markets Inc. Until then, the US currency is the “safest place to hide,” particularly as it offers a yield premium over its global peers, Citi strategists including Jamie Fahy in London wrote in a research note.
Despite this year’s $15 trillion wipeout, stocks are far from screaming buys. At 17.3 times profits, the index’s multiple is above trough valuations seen in all previous 11 bear cycles, data compiled by Bloomberg show. In other words, should equities recover from here, this bear market bottom will have been the most expensive since the 1950s.
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