US markets tumbled on Tuesday night, closing lower after monthly inflation data were released. Australian shares did the same on Wednesday. The August numbers saw an increase in both headline and core inflation – and that sent investors rushing for the exits on fears of a global recession.
The Dow Jones industrial average dropped 3.9 percent during the trading day, marking its worst intraday plummet since June 2020. The S&P 500 fell 4.3 percent on the day, and the Nasdaq Composite fell 5.2 percent, in its worst day of trading since March 2020.
The US falls followed the release of the consumer price index (CPI) for August by the US Bureau of Labor Statistics, which inched up 0.1% over the previous month, following a flat result for July. The 0.1% bump moved the headline rate to 8.3% over the last 12 months.
In the release, the bureau added that the headline rate of inflation had not only increased but core inflation had also increased in August advertisements. More worryingly for the bureau, the muted expectations of headline and core inflation going forward reinforce the need for the CPI to continue its uptrend if economic growth is to be maintained at a high level. Core inflation, which strips out more volatile categories of the CPI such as food and energy prices, rose 0.6% on a month-over-month basis for an annualized rate of 6.3%.
“It’s official: The Fed’s battle against high inflation is not over,” said Silvia Dall’Angelo, senior economist at Federated Hermes.
“Despite some respite from the recent drop in commodity prices, inflation continues to leave a bigger footprint in August, with the latest CPI report indicating broader price pressure across core goods and services,” he said.
These CPI numbers, he thinks, will prompt the Fed to keep raising rates aggressively.
[The August CPI data] is likely to tip an already-hawkish Fed towards a 3rd consecutive 0.75% rate hike at its meeting next week,” Dall’Angelo says.
Director Mark LaMonica said that the Fed's aggressive stance on putting out the inflation fire creates lasting echoes for investors.
“Shareholders' worst-case scenario is further downward pressure on stock price due to valuations we are not willing to pay and a hit to earnings as the economy slows due to higher rates,” LaMonica added.
Even as the Federal Reserve has lifted the federal funds rate up 225 basis points since March, US inflation has failed to budge. The idea that rising rates will tamp down soaring inflation has not worked out in the United States. Instead, CPI has gone up 0.4% over the last two months since February’s 7.9% inflation. Unusually for a month, the data for August has lifted the lid for investors to have seen the prices across the board have shot up.
Inflation's refusal to turn around in the face of the higher interest rates being imposed by the more hawkish Fed have reawakened fears of a worldwide slowdown among investors, sparking large sell offs like Tuesday's. Two-year Treasury note yields (which move in the opposite direction to its price) soared: to ‘over’ 3.8%, as conviction among bond traders grew that as much as a 100 basis-point hike was in store at next week’s (2 August) policy releasing.
It seems like only three weeks ago that Jerome Powell, the chair of the Federal Reserve, appeared at the Jackson Hole summit and reminded the markets that inflation remained a top priority, and that the Fed’s main job was to bring it back down to sustainable levels.
“The FOMC’s met governing objective right now is to return inflation to our 2 percent goal. It is a regrettable fact that reality is a rude way of undercutting any theory. Price stability is not only a legitimate, long-run goal of monetary policy; it is also a requirement for that declining rate of unemployment along the way to low inflation and price stability.” Price stability is the goal of the Fed, and it is the foundation of our economy,” he said.
He said that the Federal Reserve was lifting its policy rate intentionally in the hopes of achieving an interest rate that would be high enough to bring inflation back to the target. The Fed does not want to hear about those shortcomings. “In addition to its deliberations on interest rates, the Fed is also working to finalize regulations put in place after the last economic crisis that will ensure that the financial system is more resilient and banks are better equipped to respond to economic turmoil.
Shades of the recession.
It’s no surprise that we’ve heard concerns about a worldwide recession before. Investors Are Selling Stocks Investors are dumping stocks as speculation mounts that the response to record high inflation could lead to a recession, according to Bank of America’s global fund manager survey last week. In fact, a record 62% of respondents said they are overweight in cash, and 52% said they are underweight in equities, a new record low.
August inflation data will be front of mind for the Fed as they march toward next week’s monthly policy meeting and could be the key factor that determines the size of the rate hike.
