Economy

US shares surge after early gloom on inflation data

US consumer price index’s core measure of inflation rose 6.6% on an annual basis last month, its fastest pace in four decades

US stock markets fell sharply on opening as new figures pointed to stubbornly high inflation and more interest rate rises. However, they then rallied to move ahead on the day. Photograph: Michael Santiago/Getty Images

James Politi
Lauren Fedo
Kate Duguid
Thu Oct 13 2022 - 15:23

US stocks stormed back from losses sparked by a hot inflation reading on speculation the year-long selloff had potentially reached a bottom.

The rapid rise in US consumer prices showed no signs of abating in September, prompting a sharp selloff and then rebound on Wall Street, as investors feared the Federal Reserve will have to become even more aggressive to slow rampant inflation.

The consumer price index’s core measure of inflation, which strips out volatile energy and food costs, rose 6.6 per cent on an annual basis last month, faster than the 6.3 per cent rate in August – and its fastest pace in four decades.

The increase in the overall CPI last month, including energy and food, rose 8.2 per cent over a year earlier, little changed from the 8.3 per cent annual rise recorded in August. Compared with the previous month, overall CPI rose 0.4 per cent, while the core measure increased by 0.6 per cent.

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The S&P 500 dropped by 2.4 per cent shortly after Wall Street’s opening bell on Thursday. Before markets opened, the futures market had indicated a 1.3 per cent gain. However stocks then rallied and were up 1.4 per cent by late morning in New York. The Nasdaq Composite rose 1.2 per cent, recovering from a decline of almost 3.2 per cent.

Technical levels factored into the bounce. At one point, the index had given back 50 per cent of its post-pandemic rally, triggering programmed buying. A wave of put options bought to protect against such a rout moved into the money, and as profits were booked, that prompted dealers to buy stocks to remain market neutral.

“There may be some short covering going on, but also a lot was priced in, said Michael Contopoulos, director of fixed income at Richard Bernstein Advisors. “There has likely been a fair amount of defensive positioning lately in equities and on the rates side, higher policy rates means higher probability of a hard landing.”

The yield on two-year treasuries, which is sensitive to changes in monetary policy expectations, surged 0.22 percentage points to 4.51 per cent, its highest level since mid-2007, before dropping back to 0.17 percentage points up on the day.

The persistence of high inflation has been a huge political headache for the White House and congressional Democrats, overshadowing a swift recovery out of the coronavirus pandemic with millions of jobs created since Joe Biden took office as president.

Senior White House economic officials initially expected the jump in inflation to be short-lived, then rushed to find ways to ease supply chain disruptions and reduce petrol prices, as the Fed began to tighten monetary policy.

Investors and economists had been looking for signs that the Fed might start to slow the pace of its interest rate rises from the 0.75 percentage point increases it has announced at each of its past three meetings. But the CPI data released on Thursday suggest such a move is not yet on the immediate horizon.

Following the report traders in the futures market priced in a 98 per cent chance that the Fed would lift interest rates by 0.75 percentage points in November, compared with 84 per cent on Wednesday.

One of the most troubling features of the CPI report was that housing costs – described as “shelter” in the data – rose 0.7 per cent in September, as much as they had the previous month, and were up 6.6 per cent on an annual basis.

In a statement on Thursday, Mr Biden acknowledged that Americans were “squeezed by the cost of living” and said there was “more work” to do to fight inflation even though some “progress” had been made. He said that if Republicans take control of Congress “everyday costs will go up, not down”.

Republicans have made rising prices a central part of their message to voters, blaming the Biden administration for the higher costs and tying the rise in prices to the Democrat-led stimulus enacted by the president in March 2021 that injected $1.9 trillion into the US economy. – Copyright The Financial Times Limited 2022/Bloomberg

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