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Historic equity turnaround as U.S. markets shrug off hot inflation data

Despite September’s higher than estimated inflation print, stock indexes rose in a very volatile day.

America’s September’ Consumer Price Index rose 0.4% over the month, up from 0.1% in August. This was well above the 0.2% consensus priced in by the markets. Despite the rise, stock markets climbed during the trading session, possibly due to the labor market showing some cool down, with initial jobless claims easing over the week. 

Equity indexes soared across the board, with the Dow Jones Industrial Average being the top performer, jumping +2.83% after being down over 500 points earlier in the day. The S&P 500 climbed +2.60%, breaking a six-day losing streak while the Nasdaq was just behind, rising +2.23%. It marked the fifth largest intraday reversal from a low in the history of the S&P 500, and the fourth largest for the Nasdaq. 

The biggest gains were in the financial services and energy sectors, climbing 4.04% and 3.99% during the day. A reversal for tech names like Apple ($AAPL) and Microsoft ($MSFT), plus a surge in semiconductors like Nvidia ($NVDA) also contributed to the move. 

The CPI increase could cause the Fed to tighten monetary policy, raising rates beyond what the market has priced in and accelerate its quantiative easing program. However, a weaker job market means less consumer demand, which should also help to restrain advances in inflation rates. 

With the recent rise in inflation, 12-month CPI is at 8.2%, with core inflation at 6.6%, a 40-year-high. Piped natural gas, transportation services and medical services showed the biggest price increases, growing 2.9%, 1.9% and 1.0%, respectively. However it’s food prices that have remained stubbornly high in the U.S., eroding the spending power of consumers. The index rose 0.8% over the month. Items like flour, potatoes and even apples all saw big increases, while prices for some items like milk and eggs saw a drop on a monthly basis. 

Apparel fell -0.3% as retailers struggle to get rid of inventory, bracing themselves for a possible incoming recession. This might be able to explain why the consumer discretionary index was an underperformer for the day, climbing a meager +1.11%. All eyes are now on the Fed and what they will do at the next FOMC meeting in November. According to CME’s FedWatch, prior to September’s CPI print, markets had been considering a reduced interest rate hike at the meeting, of potentially just 25 basis points. That possibility has now been erased, with markets now pricing in a 75 bps hike, with a tiny possibility of a 100 bps hike.