(Bloomberg) — Stocks got pummeled after a faster-than-anticipated inflation report fueled bets the Federal Reserve will move gradually with rate cuts, which could diminish the odds of a soft economic landing.
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All major groups in the S&P 500 retreated, with financial, industrial and energy companies leading losses. The benchmark gauge dropped over 1%. Treasuries rebounded after falling in the immediate aftermath of the consumer-price data. Swap traders priced in a 25-basis-point Fed cut at next week’s gathering and see only a small chance for a half-point reduction.
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“The firmer-than-expected August core CPI inflation print will make it harder for Jerome Powell to deliver a 50 basis-point cut in September,” said Krishna Guha at Evercore. “We continue to think a starter 50 basis-point cut is the right play and might even now win out. But the odds have moved against this, and risks to markets and the soft landing are higher as a result.”
The so-called core consumer price index — which excludes food and energy costs — increased 0.3% from July, the most in four months, and 3.2% from a year ago, Bureau of Labor Statistics figures showed Wednesday. The three-month annualized rate advanced 2.1%, picking up from 1.6% in July, according to Bloomberg calculations.
“Risk-parity players are back in — buying bonds and selling stocks,” said Andrew Brenner at NatAlliance Securities. “This is ongoing and we are seeing rates make back most of their CPI losses.”
The S&P 500 fell 1.1%. The Nasdaq 100 slid 0.9%. The Dow Jones Industrial Average slipped 1.4%. The Russell 2000 Index sank 1.3%. The KBW Bank Index tumbled 2.1%. Citigroup Inc. and Bank of America Corp. slumped over 2.5%. Tesla Inc. led losses in megacaps. GameStop Corp. plunged 15% after a sales miss.
Treasury 10-year yields declined one basis point to 3.63%. That’s ahead of a $39 billion US sale of the bonds. The dollar wavered.
The inflation report has long been the most critical number in the market, but it has recently been overtaken by the concern for a cooling job market and recession worries, according to Jakob Westh Christensen at eToro.
“Going forward, the risks are clearly weighted toward slowing growth and a deteriorating labor market, and that’s why there are still four 25 bps cuts priced in with only three meetings left in the year,” said Chris Zaccarelli at Independent Advisor Alliance. “If the economy continues to slow – and not drop into an abrupt recession – the Fed will be able to cut at a measured, 25 basis-point per meeting pace.”
To David Russell at TradeStation, while the latest inflation numbers aren’t “runaway dovish,” they confirm the cooling process remains in effect. Attention could now shift from the Fed as a catalyst toward earnings and the election cycle, he noted.
“This isn’t the CPI report the market wanted to see,” said Seema Shah at Principal Asset Management. “The number is certainly not an obstacle to policy action next week, but the hawks on the committee will likely seize on today’s CPI report as evidence that the last mile of inflation needs to be handled with care and caution.”
Key events this week:
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Japan PPI, Thursday
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ECB rate decision, Thursday
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US initial jobless claims, PPI, Thursday
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Eurozone industrial production, Friday
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Japan industrial production, Friday
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U. Michigan consumer sentiment, Friday
Some of the main moves in markets:
Stocks
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The S&P 500 fell 1.1% as of 11:15 a.m. New York time
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The Nasdaq 100 fell 0.9%
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The Dow Jones Industrial Average fell 1.4%
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The Stoxx Europe 600 rose 0.1%
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The MSCI World Index fell 0.8%
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Bloomberg Magnificent 7 Total Return Index fell 0.8%
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The Russell 2000 Index fell 1.3%
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KBW Bank Index fell 2.1%
Currencies
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The Bloomberg Dollar Spot Index was little changed
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The euro was little changed at $1.1016
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The British pound fell 0.4% to $1.3027
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The Japanese yen rose 0.6% to 141.56 per dollar
Cryptocurrencies
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Bitcoin fell 2.5% to $56,142.23
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Ether fell 2.8% to $2,311.76
Bonds
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The yield on 10-year Treasuries declined one basis point to 3.63%
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Germany’s 10-year yield declined three basis points to 2.10%
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Britain’s 10-year yield declined seven basis points to 3.75%
Commodities
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West Texas Intermediate crude rose 1.2% to $66.51 a barrel
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Spot gold fell 0.1% to $2,513.98 an ounce
This story was produced with the assistance of Bloomberg Automation.
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