The only word for it is ‘ouch’. Yesterday’s promise of a return to business as usual seems worlds away now, following a massive sell-off on Wall Street not seen since 2020.
The Dow lost 3.9%, the S&P 500 shed 4.3% and the Nasdaq plummeted 5.2% - the biggest single-day percentage drops any of the indices have seen since June 2020.
Across the volatile tech sector there were steep losses, including Meta (-9.4%), Tesla (NASDAQ:TSLA) (-4%) Apple (NASDAQ:AAPL) (-5.9%) Amazon (NASDAQ:AMZN) (-7.1%) Alphabet (NASDAQ:GOOGL) (-5.9%), Microsoft (NASDAQ:MSFT) (-5.5%) and Netflix (NASDAQ:NFLX) (-7.8%).
Europe was by no means immune to the news. The pan-European STOXX 600 index lost 1.6% led by the rate-sensitive real estate sector (-3.9%). The Dax also dropped 1.6%, while the FTSE shed 1.2%.
Dire data
The obvious cause for this was US inflation information for August from the Bureau of Labor Statistics, which defied optimistic expectations that it would reveal a slowdown, instead ticking back up sharply.
Core CPI – which measures inflation without volatile items like food and energy – rose 0.1% to 6.3% from July, contradicting projections that it would fall by roughly that figure, after holding the line at zero growth from June to July.
Annual inflation was up 8.3% year-on-year, which still represented an easing from the 8.5% gain in July and the spike of 9.1% – not seen since 1982 – in June.
CPI has not declined for consecutive months since 2020.
"The silver lining was that energy prices declined 5% month-over-month, thanks in part to the 10.6% decline in gas prices. Unfortunately, this decline was not enough to offset other inflationary costs, which means that inflation is structural and baked into service costs," said Market360 editor Louis Navellier.
How far will the Fed go next?
Analysts now fear the data will force the Federal Reserve’s hand when it comes to rate hikes, with the next rise tipped to be as much as 1% – or as much as four cycles in one month.
Goldman Sachs (NYSE:NYSE:GS) certainly thinks the hawkish stance will be maintained. In a note following the August CPI data, it wrote:
“August core CPI rose by 0.57% month-over-month, well above expectations, and the year-on-year rate rose two-tenths to 6.3%. The composition was strong, with broad-based strength in cyclical and wage-sensitive services categories including shelter, restaurants, medical care, education and personal care. Airfares declined 5%, in line with our expectations.
“Headline CPI rose 0.1%, with the year-on-year rate falling two-tenths to 8.3% on lower gasoline prices.
“We have raised our forecast for the Fed’s December meeting to a 50 basis point rate hike (vs a 25 basis point previously). We now expect a 75 basis point hike in September followed by 50 basis point hikes in November and December, which would take the funds rate to 4-4.25% by the end of the year.”
Some think it will go even further, with the market pricing in a 22% chance of the next rise being in the order of 100 basis points.
"It’s the Fed’s job to stay in sync with market rates, which means it needs to continue raising key interest rates. So, the central bank is under pressure to raise key interest rates as high as 4%. If the Fed ups key rates by 75 basis points next week, which Wall Street already anticipates, rates will sit at around 3% to 3.25%. The Fed will still have to get key interest rates between 3.75% and 4%," Navellier said in commentary on the figures.
"That means two things. One, the possibility of a full 100-basis-point hike has increased. The market current prices in a 22% chance of this happening. Two, the Fed will have to raise key interest rates again in November, and that’s six days before the mid-term elections."
Australian shares are now poised to follow the US markets into the red.
ASX futures were down as much as 166 points or 2.37% to 6,843 early this morning.
The Aussie dollar slipped back down from highs near 69.15 US cents to lows near 67.25 US cents and came to rest at 67.30 US cents at the end of the trading day.
In other news
Global oil prices slumped another 1% yesterday on the back of the consumer price news in the US.
Oil bucked the trend as news came out that the Biden Administration is considering refilling its emergency reserves when prices dip below US$80 a barrel.
Brent crude fell by 83 US cents or 0.9% to US$93.17 a barrel, while US Nymex lost 47 US cents or 0.5% to finish at US$87.31 a barrel.
Base metals were mixed, as usual. The bellwether, copper, fell by 1.1% on the gloomy inflation news, while aluminium and zinc both rose 1.3%.
Gold futures were down by US$23.20 an ounce or 1.3% to US$1,717.40 an ounce, while spot gold was trading near US$1,702 an ounce at the US close.
Iron ore futures were looking up, rising by 52 US cents or 0.5% to US$102.13 a tonne on the news that property developer China Evergrande (HK:3333) Group plans to restart construction at 668 of its 706 stalled projects.