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U.S. markets suffer worst day since June 2020

Over $1.6t was wiped off the U.S. stock market as inflation rose +0.1% in August.

The Dow Jones Industrial Average was down close to 4% while the Nasdaq sank by over 5% following the inflation report.

Just five stocks in the S&P 500 finished in positive territory, with tech stocks taking the biggest beating as both Nvidia ($NVDA) and Meta ($META) suffered losses of over 9%.

The U.S Consumer Price Index printed a rise of 0.1% for headline inflation over the month of August, wreaking havoc in markets worldwide. Core inflation rose 0.6% month-on-moth, and year-on-year inflation rose 8.3%.

The year-on-year figure was down from an annual rate of 8.5% recorded in July and 9.1% in June, the highest rate in four decades.

The general consensus though amongst U.S. economists had been for a decline of 0.1% in overall inflation, with a 0.3% rise for core inflation.

The biggest contributors to the inflation rise were the prices of shelter and food, both increasing 0.7% month-on-month. Cereal and baked items drove the food increase, as the conflict in Ukraine continues to disrupt global grain supply-chains.

Despite the energy crisis still ravaging Europe, energy prices in the U.S actually plummeted -5% over August, following a drop in oil prices. Gas prices fell by -10.6% in the month, contributing to a halt in energy inflation, even though electricity and natural gas are still on the rise.

What does it mean

Rising inflation rates gives room for the FED to induce higher monetary tightening and raise interest rates even further in order to curb consumer spending. This in turn leads to lower growth expectations and higher risk-free rates, which pushes risky asset prices lower.

The 10-year U.S Treasury yield futures rose over 3% immediately after the announcement, as investors sold-off bonds fearing rate increases. Implied volatility in short-term S&P 500 stocks rose 13.3% as measured by CBOE’s VIX index, as markets adjusted for higher perceived risk in the near future.

What’s next

Markets are now pricing in a 75 bps rate hike in the next FOMC meeting on September 21, according to CME’s FedWatch, but there is also now a possibility of a 100 bps hike, which hadn’t been considered prior to the CPI print.

Although markets didn’t manage to forecast August’s CPI correctly, there were already some signs that inflation might be far from cooling off, since August’s nonfarm payroll had come in higher than expected on September 2nd.

As it stands, the FED soft landing narrative took a heavy blow, but it’s worth noting that monetary authorities consider a bigger array of data when implementing policy decisions.

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