Stocks Crushed by Inflation Shock; Yields Surge: Markets Wrap

(Bloomberg) — US stocks plunged and Treasury yields spiked higher after hotter-than-expected inflation data fueled bets for a jumbo rate hike by the Federal Reserve next week.

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The S&P 500 fell sharply in early trading, snapping a four-day rally, and the tech-heavy Nasdaq 100 sank more than 3% as yield-sensitive stocks bore brunt of selling. The two-year Treasury yield, the most sensitive to policy changes, jumped about 16 basis points. Swaps traders are now pricing in a rate increase of three-quarters of a percentage point. A gauge of the dollar reversed a decline to trade 0.9% higher.

The consumer price index increased 0.1% from July, after no change in the prior month, Labor Department data showed Tuesday. From a year earlier, prices climbed 8.3%, a slight deceleration but still more than the median estimate of 8.1%. So-called core CPI, which strips out the more volatile food and energy components, advanced 0.6% from July and 6.3% from a year ago, also topping forecasts.

“The recent bounce in equities looked incredibly ill-judged and premature,” said James Athey, investment director at Abrdn. “That CPI number is very strong relative to consensus and will not be what the Fed wanted to see at all. The chance of the pace of hikes slowing after September has receded somewhat as a result of this data.”

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“Headline inflation has peaked but, in a clear sign that the need to continue hiking rates is undiminished, core CPI is once again on the rise, confirming the very sticky nature of the US inflation problem,” Seema Shah, chief global strategist at Principal Global Investors, said in a note. “In fact, 70% of the CPI basket is seeing an annualized price rise of more than 4% month-on-month. Until the Fed can tame that beast, there is simply no room for a discussion on pivots or pauses.”

“The CPI report was an unequivocal negative for equity markets,” wrote Matt Peron, director of research at Janus Henderson Investors. “The hotter than expected report means we will get continued pressure from Fed policy via rate…

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