The last consumer price index report prior to the midterm elections came in hotter than expected — and immediately yielded economic disruption.
Inflation clocked in worse than expected at 8.2% for the 12 months ending in September, according to the Bureau of Labor Statistics. That is down from 8.3% the month before but a tenth of a percentage point higher than the consensus forecast. Worse, “core inflation,” which strips out volatile food and energy prices, rose to an explosive 6.6%, the highest rate since 1982.
INFLATION HOTTER THAN EXPECTED IN SEPTEMBER IN PRODUCER PRICE INDEX
Because of the higher-than-anticipated readings, the Federal Reserve, which has been aggressively hiking interest rates this year, is expected to raise its interest rate target even faster. Raising rates is meant to slow spending by households and businesses, so more rate hikes are an indicator that the economy is in for more pain to come.
Here are the immediate effects of Thursday’s report:
Stocks
The stock market immediately took a hit after the report was released. Futures of the Dow Jones Industrial Average were down some 500 points just minutes after the news broke. The S&P 500 was off by about 2%, and the tech-heavy Nasdaq composite plunged nearly 3%.
After opening, the S&P 500 hit its lowest level since 2020, showing just how much the markets have fallen off since the Fed started jacking up rates this year. In fact, the S&P 500 has shed more than 25% of its total value since January.
In the hours after the report, though, major stock indices were able to recoup those immediate losses. In fact, the Dow was actually up more than 600 points around midday. Some investors might have thought a hot report meant that price increases were peaking.
“We get this last gasp higher in inflation, and from here, we start to decelerate,” Liz Ann Sonders, the chief investment strategist at Charles Schwab, told CNBC. “I think there’s still plenty of things that could drive volatility, and intraday swings are just the nature of the beast right now.”
The economic uncertainty is also captured by the Chicago Board Options Exchange Volatility Index, better known as the VIX or the “fear index.” The index is up more than 97% since the start of the year.
Treasuries
Treasury yields also jolted higher following the September inflation report.
The yield on two-year Treasury, which is tied to interest rate expectations, increased to a 15-year high of 4.523%. Since then, it has fallen back a bit and was trading at 4.451% just before midday on Thursday.
The yield on the 10-year Treasury has been rising rapidly as well. It increased by 69 basis points in September, the biggest monthly increase since 2003 — showing just how aggressive the Fed’s action in raising interest rates has been.
Last month, following a two-day meeting of the Federal Open Market Committee in Washington, the central bank announced that it would hike its interest rate target by 75 basis points. The move marks the third consecutive rate hike of that scale, equivalent to nine standard 25 basis point increases.
The central bank’s rate target has grown by 2.25% in the past four months, the most forceful rate hike since the Great Inflation of the late 1970s and early 1980s. The target is now 3% to 3.25%, the highest it has been since the financial crisis in 2008.
“For investors, this should bring more short-term volatility, with equity futures down following the release while Treasury yields rose,” said Sam Millette, a fixed income strategist for Commonwealth Financial Network. “Looking forward, this also raises the stakes for future Fed meetings, with large rate hikes at the December and February meeting potentially in play if we don’t see sustained evidence of moderating inflation.”
Mortgages
The housing market is the industry perhaps most quickly affected by the Fed’s interest rate hiking. Mortgage rates have been rising at a staggering rate, making housing more unaffordable and adding to the woes consumers are already experiencing with prices across the board.
As of Thursday, the average 30-year fixed-rate mortgage was at 7.05%, up more than 3.8 percentage points from a year before, according to Mortgage News Daily. That is a 1.8-point jump since just the start of August. The rate on an average 15-year fixed-rate mortgage is now at 6.3%.
Despite declines in existing home sales, census data on new home sales for August indicated they grew by more than 20% despite the rising rates. Nevertheless, new home sale data are notoriously volatile, and the August release doesn’t entirely account for a recent run-up in cancellations.
“Existing single-family home sales have fallen throughout the first eight months of 2022 at the fourth-fastest pace over an eight-month period on record (going back to 1968),” said PNC senior economist Kurt Rankin. “So not only home prices and mortgage rates, but also the cost of maintaining a home has clearly had an impact on consumer demand and the Housing CPI trend looks likely to keep that influence intact into 2023.”
