The CPI inflation rate continued to cool in September, but less than expected. Core consumer prices, which exclude food and energy, rose at the fastest annual rate since 1982. Stocks opened in a steep dive following the CPI inflation report, but the Dow Jones turned positive by late morning. The 10-year Treasury yield jumped above 4% as the data reinforced Fed rate hike expectations, but then slashed those gains.
September's CPI inflation rate came in at 8.2%, down from August's 8.3% and June's 40-year high of 9.1%. The consumer price index rose 0.4% vs. August. Economists expected a 0.2% monthly gain with the headline inflation rate drifting down to 8.1%.
There's little evidence that underlying inflation pressures are coming down.
The core CPI inflation rate climbed 6.6%, picking up from August's 6.3%. That exceeds March's 39-year peak of 6.5%. Core prices advanced 0.6% vs. August. Wall Street had forecast a 0.4% monthly rise and core inflation at 6.5%.
Nonenergy services prices leapt 6.7% vs. a year earlier, the highest in decades.
This category of spending, which includes rent, medical services, transportation and education, are tied to the tight job market and high wage growth. So the Fed wants to see services prices — and labor markets — cooling off before backing off on Fed rate hikes.
Initial jobless claims rose 9,000 to 228,000 in the week ended Oct. 8. Wall Street expected a slight rise in jobless claims to 225,000.
Fed Rate Hike Expectations
After the CPI inflation report, it's now a lock that the Federal Reserve will hike rates by 75 basis points for a fourth straight meeting in November. That's according to the CME FedWatch Tool.
Markets also now expect 75 basis points in December, which would bring the year-end fed funds range to 4.25%-4.5%.
Fed rate hike expectations jumped after the hotter-than-expected August CPI inflation report on Sept. 13.
On Wednesday, the September producer price index rose 0.4% vs. August, double forecasts. Wholesale inflation came in at 8.5%, down slightly from August's 8.7% but just above forecasts for 8.4%. Core PPI climbed 0.3%, in line with views. Core PPI inflation cooled to 7.2% from August's 8.1%.
Fed Meeting Minutes
On Wednesday, the central bank released minutes from the Sept. 20-21 Fed meeting. Many officials. according to the Fed minutes said that "the cost of taking too little action to bring down inflation likely outweighed the cost of taking too much action." Several participants did want to "calibrate" future tightening with economic conditions.
Still, the Fed is looking for clear and convincing evidence that inflation is cooling considerably before slowing the pace of rate hikes.
Dow Jones Roars Back
The Dow Jones Industrial Average dropped 500 points at the starting bell, tumbling below its Sept. 30 low. The S&P 500 index and the Nasdaq composite sold off even more, also hitting bear market lows.
But the major indexes rebounded, with the Dow soaring 2.8%. The S&P 500 leapt 2.6% while the Nasdaq composite gained 2.2%.
The major indexes had also sold off hard after the August CPI inflation report on Sept. 13. Heading into that report, stocks had rallied on hopes for a soft inflation reading and a "Fed pivot" to slower rate hikes. That has been the pattern heading into Fed-critical reports in the past few months, but not this time.
The major indexes fell slightly on Wednesday. The Dow Jones is just above a two-year bear market low set on Sept. 30. The S&P 500 and Nasdaq composite hit fresh bear market lows this week.
The 10-year Treasury yield surged to a 13-year peak of 4.06% intraday, but by late afternoon was up just 5 basis points, to 3.95%. Some of that could reflect concerns about a recession or global market upheaval. The two-year yield, more closely tied to Fed policy, spiked 19 basis points to 4.47%.
The U.S. dollar initially gained ground, but reversed lower.
In premarket action, Dow futures had rallied before the CPI report, while Treasury yields dipped, on reports that the new U.K. government was planning to scrap much of its budget plan, including tax cuts. That deficit-financed plan had slammed the British pound and sent yields soaring, spurring the Bank of England to announce emergency bond buys. The BoE says those bond buys will end.
While the U.K. is facing its own issues, it comes amid a backdrop of an aggressive Federal Reserve sending the U.S. dollar soaring, putting strains on markets around the world.
Please follow Ed Carson on Twitter at @IBD_ECarson for stock market updates and more.
