Stocks Dropped, Dollar Climbed As Surging U.S. Inflation Points To An Aggressive Fed

Summary

• Dollar recovers after inflation’s upward surprise
• Global stock index crashing, Wall Street stocks sell-off
• Oil prices fall back, Treasury yields climb

The dollar index recovered on Tuesday and the S&P 500 slid 4% while Treasury yields rose after figures showed U.S. consumer prices increasing higher than anticipated in August, sparking bets for more hawkish Federal Reserve rate hikes.

Oil futures also fell back after the Labor Department data on Tuesday showed that falling gasoline prices in August were neutralized by gains in food costs and rent. The Consumer Price Index rose 0.1% in August against expectations for a 0.1% fall and after staying unchanged the month before.

Wall Street’s equity indexes saw their sharpest one-day percentage falls since June 2020.

This was a sharp turnaround after the most important stock indexes had recovered on Monday and in the previous week as investors had bet Tuesday’s data would indicate cooling inflation and offer a path for the Fed to ease its policy tightening.

But by Tuesday’s close, the expectations for more hawkish tightening were instead stoking investor concerns about the economy.

Greg Bassuk, chief executive of AXS Investments in New York, stated:

“As the day went on it seems that there’s growing concern about the upcoming Fed meeting, concern that the Fed may make a more hawkish move than earlier anticipated. What grows from that is the greater likelihood the economy could be tipped into a recession.”

The Nasdaq Composite (.IXIC) fell 5.16%, or 632.84 points, to 11,633.57; while the S&P 500 (.SPX) tumbled 4.32%, or 177.72 points, to 3,932.69; and the Dow Jones Industrial Average (.DJI) declined 3.94%, or 1,276.37 points, to 31,104.97.

“Moderating inflation is key to higher equity prices and at the moment inflation is running hot. That implies volatility will remain more the norm than the exception into year-end,” said Terry Sandven, chief equity strategist at US Bank Wealth Management in Minneapolis.

“It clearly suggests the Fed next week will deliver more of the same and remain unwavering in their pursuit to tame inflation.”

MSCI’s gauge of stocks across the world (.MIWD00000PUS) lost 3.39% in its largest daily decline since June 13 after the index had increased in the previous four sessions.

“This was another disappointment. It’s the old Charlie Brown analogy. Every time we’re ready to kick the ball, it’s moved away from us,” said Mona Mahajan, senior investment strategist at Edward Jones.

In currencies, the dollar index gained 1.534% in its largest one-day percentage rise since March 19, 2020, with the euro sliding 1.46% to $0.9971 on Tuesday. The Japanese yen plunged 1.17% against the safe-haven greenback at 144.52 per dollar, while the Sterling was last trading at $1.1499, falling 1.54% on the day. FRX

In the meantime, U.S. Treasury yields jumped and a recession warning – the yield curve inversion – broadened after the inflation data also defied bond investor expectations.

Benchmark 10-year notes last dropped 14/32 in price to gain 3.4157%, compared to 3.362% late on Monday. The 2-year note last dropped 10/32 in price to gain 3.7434%, a rise from 3.571% in the previous session.

The gap between yields on 10 and two-year notes, seen as a recession indicator, was just under -33 basis points.

“It really comes down to how sticky inflation remains,” said Mauricio Agudelo, senior fixed income portfolio manager at Homestead Funds Advisers. “It’s a battle that the Fed will continue to fight and they will have to continue pressing, unfortunately at the risk of breaking something.”

Oil prices swung lower after the inflation data and new COVID-19 restrictions in China, the world’s second-biggest oil consumer, also pushed down crude prices.

Oil is mostly priced in U.S. dollars, so a stronger greenback makes it more expensive to holders of other currencies. U.S. crude came down 0.54% at $87.31 per barrel and Brent stood at $93.17, a drop of 0.88% on the day.

The rising dollar also weighed on gold prices. Spot gold fell 1.3% to $1,702.39 an ounce while U.S. gold futures dropped 1.45% to $1,705.00 an ounce.