The benchmark S&P 500 index dropped more than 3% on Tuesday as investors quickly exited their long positions built recently amid hopes that inflation might be easing.
US inflation stays elevated
In contrast to estimates of -0.1% monthly, headline CPI increased by 0.1% MoM. Inflation has been climbing for 27 months in a row. The annualized CPI fell to 8.3% from the projected 8.1% and 8.5% in July.
The big surprise was the increase in the food index over the past year, which was 11.4%, the largest 12-month increase since the period ending May 1979, while the increase in the food at home index was 13.5%, the largest 12-month increase since the period ending March 1979. Meanwhile, the rise in energy fizzled, with the energy index increasing 23.8% for the 12 months ending August, a smaller increase than the 32.9% increase for the period ending July.
Finally, the core number was 0.6% month-on-month as opposed to the 0.3% anticipated and 0.3% previously. As a result, the yearly core CPI increased to 6.3% versus the projected 6.1% and the 5.9% booked in July.
According to BofA’s Michael Gapen, the “solid” reading on core CPI and core goods prices in particular “suggests that underlying price pressures remain firm and that the Fed’s work is only just beginning. As a result, we expect a 75bps rate hike in September and a terminal funds rate of 4.0-4.25% early next year.”
In his conclusion, he states that his “outlook for the US economy includes a mild downturn in 1H 2023 and a restoration of price stability in 2024.” However, he continues, “solid employment gains alongside firm core inflation readings, in our view, point to additional monetary policy tightening and hard landing risks.”
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After the data, metals, stocks, and bonds plunged sharply, while the USD soared. Consequently, STIRs are now pricing in a 20% chance of a 100bps Fed Hike next week, while November is now pricing a 50% chance of a 75bps hike, and December is pricing a 25% chance of a 50bps hike.
Previous days have seen some buildup of long positions, hoping the Fed might not be so hawkish anymore. Unfortunately, it seems those investors were wrong, quickly leading to a massive decline today.
The following support is expected at 3,900 USD. On the other hand, the index must climb back above 4,050 USD to cancel the current negative momentum.