US Stocks Are Headed For A Big Drop After Hot Inflation Report

Us Stocks

US Stocks Are Headed For A Big Drop After Hot Inflation Report

On Tuesday morning in the US, stock futures fell as an August inflation report came in higher than predicted.

Dow Jones Industrial Average futures sank 525 points or about 1.6%. S&P 500 futures fell more than 2% and Nasdaq 100 futures slid 2.7%.

The August consumer price index report showed a higher-than-expected reading for inflation. Headline inflation rose 0.1% month over month, even with falling gas prices. Core inflation rose 0.6% month over month. On a year-over-year basis, inflation was 8.3%.

Economists surveyed by Dow Jones had been expecting a decline of 0.1% for overall inflation, with a rise of 0.3% for core inflation.

The report is one of the last the Fed will read before their September 20-21 meeting, when they are likely to raise interest rates by 0.75 percentage points to combat inflation. The unexpectedly high August report may prompt the Fed to continue its aggressive rate hikes for a longer period of time than some investors anticipated.

The surge in futures follows four straight bullish sessions for US stocks, which were boosted in part by many investors’ conviction that inflation had already peaked.

“The CPI report was an unequivocal negative for equity markets. The hotter than expected report means we will get continued pressure from Fed policy via rate hikes,” said Matt Peron, director of research at Janus Henderson Investors. “It also pushes back any ‘Fed pivot’ that the markets were hoping for in the near term. As we have cautioned over the past months, we are not out of the woods yet and would maintain a defensive posture with equity and sector allocations.”

A long road ahead until inflation is under control, according to a strategist.

Investors are getting a rude awakening that high inflation could be here to stay after August’s hot CPI report.

Traders are betting that the August inflation report will force the Federal Reserve to be more aggressive in the near and longer terms with its rate hikes.

Next week’s Federal Reserve policy meeting is bound to raise the fed funds lending rate at least three-quarters of a percentage point (75 basis points), but there’s even a remote, outside chance that the central bank hikes by a full percentage point next week, according to Nomura economist Rob Dent.

“In terms of the Fed, this feels like it absolutely locks in 75 for the September meeting but maybe increasing the risk for 100, though that’s not the base case,” Dent said. “People will have to consider that they could raise 75 basis points in November, given how strong this report is,” Dent said, referring to the miserable August inflation numbers.

August showed surprisingly broad-based inflation, Dent said. Previously, “we saw this tug of war between goods moderating and services remaining strong. This is not a tug of war. They both moved up,” said Dent. “Right now I think the Fed is going to be looking at this with a lot of concern. This is no good news across this report.”

Tech Leading The Decline Following The CPI Report

After inflation unexpectedly rose in August and rates surged, technology shares were leading the way lower in premarket trading.

After surprisingly rising inflation and rates in August, technology shares were leading the way lower in premarket trade.

Amazon and Tesla both saw their shares fall 3% in early trading. Microsoft and Alphabet both lost 2%. Nvidia fell 4%. Traders are concerned that increased interest rates may halt the expansion of the technology sector and expose its relatively high valuations, as well as prompt investors to reduce risk.

Premarket trade saw widespread declines, with the majority of S&P 500 equities set to fall. Banks were down on concerns that the Federal Reserve will force the economy into a recession. Bank of America and JPMorgan both suffered 1.5% losses.

Energy stocks also fell as a result of recession fears. Exxon and Chevron both dropped approximately 1%.

The market had been trading on the view that if CPI showed moderation, the Fed might be able to pause its rate hiking early next year. The last CPI report was a surprise to the downside, and the jobs number was strong.

“This ends the whole fairy tale that the Fed would get three good reports in a row.” said Michael Schumacher of Wells Fargo. “Too bad, Cinderella, it’s after midnight.”


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