Investors Fear The Fed May Douse The Economy After Hot CPI Report

(Tuesday Market Close) Stocks had their worst day since June 2020, but the culprit wasn’t the continuing pandemic—now it’s inflation. The slide started moments after hotter-than-expected August Consumer Price Index (CPI) data was announced. The CPI rose 0.1% month over month (MOM) instead of the decline of 0.1% forecast by analysts. Year over year (YOY), CPI grew at a pace of 8.3%, also unexpectedly higher than the forecast of 8.1%.

Core CPI was projected to be 0.3% MOM and 6.1% YOY but came in at 0.6% and 6.3% respectively.

The biggest increases in August were seen in energy services with electricity costs rising 1.5% and gas utilities up 3.5%. This may be due to a particularly hot August and the costs of cooling off.

However, food bills and new vehicle prices both increased at a pace of 0.8% last month and shelter costs also rose 0.7%.

Energy commodities continued to see some large declines with gasoline price falling 10.6%.

Over the previous 12 months, the items with the largest increases included fuel oil (68.8%), gas utilities (33%), gasoline (25.6%), food at home (13.5%), and medical care services (11.3%).

With inflation still growing at such a fast pace, investors are expecting a more aggressive Federal Reserve at its rate meeting next week. The CME FedWatch Tool was calculating a 68% probability of a 75-basis-point hike and a 32% chance of 100 basis points. Running up to today’s CPI announcement, the probabilities of 75-point hike were actually dwindling, and investors appeared to have convinced themselves that 50 points would be a more likely decision.

Looking forward to the November meeting, at today’s close, the tool was projecting a 33.1% probability of 25-point hike. However, it was giving a 66.9% chance of a 50-point hike. By the end of the year, the fed funds rate is projecting to be 4% to 4.5%.

The 10-year Treasury yield (TNX) jumped six basis points to 3.42% and is nearing its June high when so much uncertainty surrounded the commodity markets due to the Russia-Ukraine war. The 2-year Treasury yield rose 18 basis points to 3.75%.

Rising yields caused the U.S. Dollar Index ($DXY) to surge—climbing 1.44%. The dollar index regained its previous three days of losses and is nearing its September high.

The major indexes all plummeted with the Nasdaq ($COMP), S&P 500® index (SPX), and Dow Jones Industrial Average ($DJI) respectively closing -5.16%, -4.32%, and -3.94% on the day. Growth stocks appeared to take the biggest hit as the S&P 500 Pure Growth Index plunged 4.71%.

However, value stocks weren’t immune as the S&P 500 Pure Value Index dropped 3.59%. Even income stocks struggled as the Dow Jones U.S. Select Dividend Index fell 3.14%.

Not surprisingly, all market sectors were negative on the day led by technology, consumer discretionary and financial stocks. Energy stocks were down the least; however, WTI crude oil futures settled only 0.4% lower.

The PHLX Semiconductor Index (SOX) led the plunge falling 6.18% on the day. However, the homebuilders and retailers came tumbling after with the S&P Homebuilders Select Industry Index and the Dow Jones U.S. Retail Index respectively falling 5.90% and 5.80%. 

Sitting On Cash

A BofA Securities survey reveals that more than half of fund managers continue to ditch equities in favor of cash due to recession fears. A record 52% of respondents reported that they were underweighted in stocks while 62% were overweighted in cash. Participants also reported that they were shunning European stocks too, with 42% reporting they’re now underweighted. This was the largest such position on record for European stocks, according to the survey.

BofA Securities also revealed that not only are investors high on cash, they’re also long the U.S. dollar, oil and commodities, ESG assets, and growth-oriented investments.

However, the fund managers also said they were short U.S. Treasuries.

They did say that they think inflation will recede. In fact, 79% projected slower inflation over the next 12 months. Additionally, 36% thought the Fed would stop hiking rates in Q2 of 2023.

However, 70% of the global fund managers surveyed expected the Europe’s energy crisis to take the continent into a recession.

Notable Calendar Items

Sep 14: August Producer Price Index (PPI)

Sep 15: August U.S. Retail Sales, Philadelphia Fed Manufacturing Index and earnings from Adobe (ADBE)

Sep 16: Michigan Consumer Sentiment

Sep 19: Earnings from AutoZone (AZO)

Sep 20: Building permits and Housing starts 

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