Stocks Pare Drop as Traders Weigh Fed’s Next Move: Markets Wrap

(Bloomberg) -- US stocks pared losses and Treasury yields fell back from highs, as investors assessed the impact of the latest hot inflation reading on the Federal Reserve’s policy path.

The S&P 500 pulled back from session lows, catching bids after trading below the 3,500 level for the first time since 2020. The yield on policy-sensitive two-year notes spiked above 4.5% before dropping back.

A gauge of consumer price growth rose to a 40-year high last month, sealing the case for the Fed to deliver a large rate hike in November. Stocks have plunged more than 25% this year as the central bank began tightening policy to curb inflation, leaving investors to weigh how much damage is left for share prices.

Read more: Core US Inflation Rises to 40-Year High, Securing Big Fed Hike

The latest data added to evidence the harsh monetary medicine has yet to take hold and comes on the heels of last week’s payrolls figures that showed unemployment rate at a five-decade low in September.

Risk assets have been under pressure all year as central banks around the world attempt to tame runaway inflation. The latest data added to evidence the harsh monetary medicine has yet to take hold and comes on the heels of last week’s payrolls figures that showed unemployment rate at a five-decade low in September.

“This isn’t the CPI report markets or the Fed were hoping for,” said James Athey, investment director at abrdn. “Inflation pressures remain stubbornly high. The reality is that for the foreseeable future the Fed is locked into a stance of unequivocal hawkishness. This will support bond yields and the US dollar but its yet more bad news for equities.”

Market bets on rates now lean toward back-to-back 75 basis-point hikes at the next two Fed meetings. They now expect the central bank to push rates past 4.85% before the tightening cyle ends. The current rate is 3.25%.

More market commentary

• “After today’s inflation report, there can’t be anyone left in the market who believes the Fed can raise rates by anything less than 75bps at the November meeting,” Seema Shah, strategist at Principal Global Investors wrote. “In fact, if this kind of upside surprise is repeated next month, we could be facing a fifth consecutive 0.75% hike in December with policy rates blowing through the Fed’s peak rate forecast before this year is over.”
• 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 financial accident.”

Meanwhile, UK markets remained in turmoil almost two weeks after the government unveiled a plan to drastically cut taxes.

Speculation leaders may reconsider the controversial program sent the pound higher and yields on benchmark gilts tumbling more than 25 basis points.

Key events this week:

• Earnings this week include: JPMorgan Chase & Co., Citigroup Inc., Morgan Stanley, BlackRock Inc., Delta Air Lines Inc., UnitedHealth Group Inc., U.S. Bancorp, Wells Fargo & Co.
• G-20 finance ministers and central bankers meet, Thursday
• China CPI, PPI, trade, Friday
• US retail sales, business inventories, University of Michigan consumer sentiment, Friday
• BOE emergency bond buying is set to end, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 1% as of 10:45 a.m. New York time
• The Nasdaq 100 fell 1.7%
• The Dow Jones Industrial Average fell 0.4%
• The Stoxx Europe 600 fell 0.1%
• The MSCI World index fell 1%

Currencies

• The Bloomberg Dollar Spot Index rose 0.2%
• The euro was little changed at $0.9695
• The British pound rose 0.8% to $1.1194
• The Japanese yen fell 0.3% to 147.35 per dollar

Cryptocurrencies

• Bitcoin fell 3.9% to $18,428.97
• Ether fell 5.9% to $1,222.38

Bonds

• The yield on 10-year Treasuries advanced seven basis points to 3.97%
• Germany’s 10-year yield declined one basis point to 2.30%
• Britain’s 10-year yield declined 24 basis points to 4.20%

Commodities

• West Texas Intermediate crude fell 0.1% to $87.17 a barrel
• Gold futures fell 1.5% to $1,652.80 an ounce

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