(Bloomberg) — Stocks fall on data showing higher-than-expected inflation and a slowing labor market, and whether the Federal Reserve will opt for a small interest rate cut next month or after a big rate cut in September. The debate over whether to suspend the program has amplified.
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The S&P 500 index took a breather after rising to record highs. Thursday’s economic data wasn’t received as devastating on Wall Street, but it certainly highlighted the Fed’s challenge in getting inflation back to its 2% goal without triggering a recession. And that’s fueling even more debate about the Fed’s next steps. For now, bond traders continue to expect the central bank to cut interest rates to 25 basis points in November.
Three Fed policymakers, John Williams, Austan Goolsby and Thomas Barkin, were unfazed by the better-than-expected consumer price index and signaled that officials could continue lowering rates. . The outlier was Rafael Bostic of the Atlanta Fed. In an interview with the Wall Street Journal, he said the outlook he released in September called for an additional quarter-point cut this year. The Fed has two meetings left in 2024.
Chris Larkin of E “This could increase market uncertainty.” *Transactions from Morgan Stanley. “These were not good numbers, but they do not overshadow the broader picture of solid economic growth and moderate inflation.”
Quincy Crosby of LPL Financial said in a note titled “Fed’s Embarrassment as Inflation Rises, Labor Cools,” that the latest economic data was not the combination the Fed was hoping for.
“If inflation statistics continue to show that prices are rising across the board due to a cooling labor market, the next FOMC will no doubt lead to even more heated debates about which of the Fed’s responsibilities should take priority. It will happen.”
The S&P 500 fell 0.4%. Energy stocks also added to the rally, although most major groups retreated as speculation over Israel’s response to the Iranian missile attack continued to rattle markets. Megacaps were mixed, with NVIDIA rising and Apple falling. Tesla fluctuated as investors awaited the debut of the company’s fully self-driving cars later Thursday.
The yield on the 10-year U.S. Treasury rose 1 basis point to 4.09%. The Bloomberg Dollar Spot Index was shaken.
Wall Street’s reaction:
Today’s CPI report will dampen enthusiasm for next month’s rate cut, and if some of these other factors increase uncertainty, especially with the S&P 500 at a new all-time high, This could provide an excuse for a short-term exit from the market.
The Fed has said the last mile to its inflation target will be difficult, and that’s what we’re seeing. But we still expect the Fed to cut rates by a quarter of a percentage point in November, and likely a similar rate cut at its December meeting.
In fact, the report was enough to solidify the case for another quarter-point cut. While inflation has not receded quickly enough to justify an accelerated pace of policy easing, the upside surprise was not enough to raise serious questions about the underlying disinflationary trend.
The Fed is not yet in a position to declare “mission accomplished” in its fight against inflation, and the path to its 2% goal remains steep.
Bearing in mind the dual mandate of prioritizing maximum employment and price stability, the Bank will look forward to the next monthly employment report, which will be released in early November, before the next interest rate announcement. What is certain now is that rates will be cut by a quarter of 1% in the last two meetings of the year.
The CPI unexpectedly rose in September, with both the composite index and core index rising faster than consensus expectations. However, the core rate hike was not strong enough to preclude a rate cut in November.
The Fed has indicated it is willing to accept the possibility of higher-than-normal inflation in order to support full employment. Only if inflation rises toward 4%, or if several hot inflation episodes occur in succession, will the Fed change its mind about continuing to lower rates over the next year.
Given that the recent employment report was so strong, a big upside surprise for inflation could cause the Fed to pause at its next meeting and leave interest rates unchanged.
However, given that this month’s report was slightly higher than expected, the Fed could cut rates by 25 bps next month, and if there are no significant changes in the labor market or inflation data by the end of the year, it could move forward. remains high. It will rise another 25 bps in December.
Markets reacted negatively to recent hints from policymakers that the next rate cut would be 0.25%, but history has taught us that successive dramatic rate cuts can lead to a slowdown in the economy. Investors may expect a rate cut next month, as they tend to happen in times of distress. It is wise to expect a gradual decline.
Company highlights:
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Delta Air Lines expects profits and revenue to fall below Wall Street expectations in the final months of the year, suggesting a slow recovery from a tough summer travel season.
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Domino’s Pizza has lowered its forecasts for sales growth and new store openings in 2024 as weak consumer spending hits the restaurant industry.
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Pfizer company officials have threatened legal action against two former executives who worked with Starboard Value to drive the company’s transformation, an activist investor said Thursday. He made this claim in a letter to the association.
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GXO Logistics, a supply chain service provider that spun off from trucking company XPO in 2021, is considering a sale, according to people familiar with the matter.
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Eli Lilly & Co. is pursuing legal action against a company that was temporarily allowed to manufacture and sell counterfeits of its blockbuster drug used for weight loss until a shortage in the U.S. was resolved last week. is being strengthened.
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Toronto-Dominion Bank will pay about $3 billion in penalties in a settlement with regulators over its failure to crack down on money laundering, the Wall Street Journal reports, adding that it could limit U.S. growth. It will take a while.
This week’s main events:
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JPMorgan and Wells Fargo kick off earnings season for big Wall Street banks on Friday.
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US PPI, University of Michigan Consumer Sentiment, Friday
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Fed’s Laurie Logan, Austan Goolsby and Michelle Bowman speak on Friday
The main movements in the market are:
stock
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As of 2:43 p.m. New York time, the S&P 500 was down 0.4%.
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Nasdaq 100 fell 0.3%
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The Dow Jones Industrial Average fell 0.4%.
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MSCI World Index falls 0.3%
currency
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Bloomberg Dollar Spot Index little changed
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The euro fell 0.1% to $1.0925.
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The British pound fell 0.2% to $1.3049.
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The Japanese yen rose 0.4% to 148.66 yen to the dollar.
cryptocurrency
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Bitcoin fell 2.2% to $59,080.3.
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Ether fell 0.5% to $2,342.92.
bond
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The 10-year Treasury yield rose 1 basis point to 4.09%.
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German 10-year bond yield remains unchanged at 2.26%
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The UK 10-year bond yield rose 3 basis points to 4.21%.
merchandise
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West Texas Intermediate crude rose 3.5% to $75.80 per barrel.
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Spot gold rose 0.8% to $2,627.99 an ounce.
This article was produced in partnership with Bloomberg Automation.
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