Stocks plunged this morning in response to a hot Consumer Price Index (CPI) reading before rallying viciously on news from the European Central Bank (ECB).
The Dow, S&P, and Nasdaq Composite all traded significantly higher through noon despite inflation data that one analyst called “horrible.”
Consumer prices rose 0.4% month-over-month in September, beating the +0.2% estimate. Core inflation climbed even higher, rising 0.6% monthly vs. +0.4% expected, while hitting a 40-year high.
Wall Street was stunned by the data.
“It is brutal […] I do think that prices will start to moderate. I thought that this would already be happening at this point,” said Morgan Stanley Investment Management’s Jim Caron on Bloomberg TV.
“The issue now is that inflation has moved from the goods sector and has permeated into the services sector.”
Bloomberg senior editor Chris Antsey explained the political implications of such a hot report.
“For Democrats, this is a disaster,” he said.
“Today’s is the final CPI report ahead of the Nov. 8 midterm election. You can bet that Republicans will be hitting this hard. Worst inflation in four decades.”
Steve Chiavarone, senior portfolio manager at Federated Hermes, highlighted what this report could mean moving forward.
“This report raises the risk that we may see a new cycle high in headline inflation before the end of the year,” he said.
“With energy prices moving back up, a mid-90s oil price in December could see us surpass the 9.1% headline peak from June […] Looking at the components, what is most worrying is the big jump in services. Service inflation is the most sticky. This is where both shelter prices and wages reign supreme.”
The Fed knows this, too, and it prompted NetAlliance Securities strategist Andrew Brenner to claim that September’s reading was a “horrible CPI number.” He also questioned whether the Fed will raise rates by 100 basis points at its next meeting following this morning’s release.
The feeling on Wall Street was extremely bearish, at least until headlines out of Europe showed that the ECB may be done hiking rates sooner than expected. Reuters reported today that ECB officials unveiled a terminal rate of just 2.25% to European Union policymakers at a retreat in Cyprus last week.
Up until now, the market had assumed that the ECB was planning on raising rates to 3.00%. A terminal rate of 2.25% came as a huge surprise even though policymakers at the retreat reportedly were unimpressed given that the ECB failed to accurately predict the recent surge in prices.
Nonetheless, bulls loved this news as it implied that central banks may be making a full pivot, and soon. Keep in mind, however, that the ECB is about 6 months behind the Fed in terms of rate hikes.
Back in April, the Fed’s target rate was much lower than it is now. It’s likely that the ECB raises its long-term target substantially at its next meeting.
That’s why it doesn’t seem like news worth sparking a massive intraday rally, especially after such a bearish CPI print.
But, given the market’s massive volatility of the last few months, it’s not all that surprising, either. And that also means dip-buying bulls need to be careful, as stocks are just one bad headline away from another plunge lower.
