Markets tumbled Thursday as investors balked at another hotter-than-expected inflation rate, cementing expectations for another massive Federal Reserve rate hike next month.
The S&P 500 fell sharply, falling more than 2 percent for the day and marking a new year’s low. The drop comes after another drop on Wednesday, the sixth straight daily drop.
US Treasury yields, which serve as a benchmark for borrowing costs and are impacted by Fed actions, surged. The two-year Treasury yield rose more than 0.2 percentage point to a new high of 4.5 percent, a big move for an asset that normally moves in hundredths of a percentage point.
The September CPI report showed that inflation rose from the previous month, the second consecutive month that inflation has not fallen.
The new data will be crucial in informing policymakers, and therefore investors, how much more interest rates need to rise before inflation falls steadily. The report has also gained traction as investors grew concerned about the impact of rising interest rates on global financial stability following further turmoil in UK government bond markets this week.
“There are a lot of people out there looking for peak inflation and a slowdown in Fed rate hikes, but the data isn’t in their favor,” said Charlie Ripley, senior investment strategist at Allianz Investment Management. “That will put pressure on the Fed to do more.”
A three-quarter-point rise is forecast based on prices in the futures markets, which show where investors expect rates after the Fed’s upcoming meeting. Once a rare occurrence, this would be the fourth surge of this magnitude this year.
Investors increased their bets on a Fed rate hike again in December by three-quarters of a point and recalibrated expectations for how high interest rates could get next year, with a peak of around 4.86 percent in May, above own forecasts the fed
Some investors are still hoping for a more cautious move from the Fed, fearing prolonged rate hikes could bring markets closer to a financial crash, much like the shockwaves that hit UK markets in recent weeks.
Cracks are emerging around the world, adding to investor concerns. Japanese government bonds were hardly traded daily as they were constrained by government intervention. Mortgage rates are at their highest levels since the turn of the century. Corporate bonds have fallen in value. “Everything is coming to a head at once,” said Andrew Brenner, head of international fixed income at National Alliance Securities.
The dollar rose Thursday and continued its climb, putting pressure on other economies around the world whose currencies have depreciated.
“We’re in a new regime here with higher rates,” Mr. Ripley said. “The longer they stay elevated, we’ll see some interesting things in the market.”
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