Stocks, Futures Fall on Hawkish Post-CPI Fed Views: Markets Wrap

(Bloomberg) — Stocks and US equity futures fell Thursday after sizzling US inflation data buffeted Wall Street, hardening bets on more aggressive Federal Reserve monetary policy tightening and an ensuing economic downturn.

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An Asian share gauge dipped, led by Japan, while S&P 500 and Nasdaq 100 contracts shed about 0.5%. A volatile US session ended with modest losses, a resilience possibly rooted in speculation over whether the 9.1% consumer-price reading marks the peak.

Read: Inflation Is Awful, Stocks Survive: Parsing the Tepid Reaction

Traders shifted toward expectations of an historic one percentage-point Fed interest-rate hike later this month. Fed Bank of Atlanta President Raphael Bostic said “everything is in play” to combat price pressures.

Fed Bank of Cleveland President Loretta Mester said in a Bloomberg Television interview the CPI report was uniformly bad and that the central bank will need to go well beyond the neutral level of rates. The figures don’t suggest a smaller hike than in June, she added.

Treasury two-year yields, sensitive to imminent Fed moves, climbed further and longer-maturity rates were steady. The inversion between two-year and 10-year yields — a potential recession indicator — was at levels unseen since 2000.

A dollar gauge advanced, commodity-linked currencies retreated and the euro fell back toward $1 after briefly dipping below that level on Wednesday. The loonie pared gains following a 100 basis points hike by the Bank of Canada. Crude oil hovered around $96 a barrel. Bitcoin rallied past $20,000.

The big question for markets is whether the latest inflation print marks the peak. Commodity prices, pushed up this year in part by supply disruptions related to Russia’s war in Ukraine, have moderated somewhat of late.

But if higher costs prove to be persistent and come alongside an economy buckling under rate hikes, that could be toxic for a range of assets already nursing heavy losses this year.

“Stubbornly high inflation increases the risk that the FOMC continues to hike aggressively and triggers a recession,” Kristina Clifton, senior economist at Commonwealth Bank of Australia, wrote in a note. That’s increasingly the market’s base case and recession fears will continue to support the dollar, she added.

Swaps referencing Fed meeting dates are priced for the policy rate to peak at about 3.7% this December, up from the current target range of 1.50%-1.75%. Traders then expect the Fed to start cutting rates, with more than three quarters of a percentage point of reductions priced in between the expected peak and the end of March 2024.

In Singapore, the central bank unexpectedly tightened monetary policy on Thursday, sending the currency higher. Meanwhile, a Chinese central bank official said liquidity in the interbank market is more than “reasonably ample,” a sign that further rate cuts are unlikely.

Traders are also monitoring any impact after US Securities and Exchange Commission Chair Gary Gensler cast doubt on the possibility of a deal being reached with China on access to Chinese companies’ audit reports.

What to watch this week:

  • Earnings due from JPMorgan, Morgan Stanley, Citigroup, Wells Fargo

  • US PPI, jobless claims, Thursday

  • China GDP, Friday

  • US business inventories, industrial production, University of Michigan consumer sentiment, Empire manufacturing, retail sales, Friday

  • G-20 finance ministers, central bankers meet in Bali, from Friday

  • Atlanta Fed President Raphael Bostic speaks, Friday

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Some of the main moves in markets:

Stocks

  • S&P 500 futures slid 0.5% as of 9:28 a.m. in Tokyo. The S&P 500 fell 0.5%

  • Nasdaq 100 futures fell 0.6%. The Nasdaq 100 fell 0.1%

  • Japan’s Topix index was down 0.3%

  • South Korea’s Kospi index dropped 0.4%

  • Australia’s S&P/ASX 200 Index added 0.1%

Currencies

  • The Bloomberg Dollar Spot Index rose 0.3%

  • The euro fell 0.3% to $1.0035

  • The Japanese yen was at 137.70 per dollar, down 0.2%

  • The offshore yuan was at 6.7324 per dollar, down 0.1%

Bonds

Commodities

  • West Texas Intermediate crude was at $95.84 per barrel, down 0.4%

  • Gold fell 0.4% to $1,729.29 an ounce

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