Dow Drops 500 Points As Stocks Tank After Still-Hot Inflation Reading

Topline

Stocks dropped sharply early Thursday before shooting upwards in response to data revealing stubbornly high inflation, as investors interpreted the data as a “last gasp” for inflation before cooling.

Key Facts

The Dow Jones Industrial Average rose 2.8%, or 810 points, and the S&P 500 and the tech-heavy Nasdaq gained 2.7% and 2.4%, respectively, reversing earlier losses of about 2% for each index.

The Labor Department’s latest consumer price index reading revealed prices rose 0.4% from August to September, surpassing economist estimates, with prices rising 8.2% year-over-year.

“We get this last gasp higher in inflation and from here we start to decelerate,” Charles Schwab analyst Liz Ann Sonders told CNBC.

Investors first piled into bond markets and the dollar: 10-year U.S. Treasury note yields jumped 16 basis points to 4.06%, up nearly 50 basis points from a week ago, while the Dollar Index, which measures the dollar against a basket of six currencies, rose nearly 1%, before the yield dipped back down to 3.95% and the dollar index fell 1%.

Cryptocurrency also tanked initially, with bitcoin falling more than 4% after the inflation reading, before rising to a more modest 1% decline.

Crucial Quote

Vital Knowledge analysts wrote in a Thursday note they’re “quite confident that the economy is evolving faster than the formal gov’t statistics are capturing, and this means the inflation/Fed fears are way overblown.”

Key Background

The Labor Department released another key inflation metric Wednesday, the producer price index, which measures wholesale inflation. Producer prices rose 0.4% from August to September, surpassing a 0.2% jump estimated by economists. The stock market crashed after the release of the latest consumer price index reading, with the S&P, Dow and Nasdaq each falling by 3.9% or more, the largest single-day declines of 2022 for each index. Stocks typically fall as interest rates rise (or are expected to rise) because companies tend to become less willing to borrow money at higher rates and consumers tend to cut back spending.

Surprising Fact

This is the first time the S&P has suffered two six-day losing streaks in a calendar year since 2018.

What To Watch For

Citigroup, JPMorgan Chase, Morgan Stanley and Wells Fargo all report earnings Friday morning. The major banks’ financial results are expected to be “fairly robust,” UBS analysts Solita Marcelli and Bradley Ball wrote in a Tuesday note, but noted the market will primarily focus on recession indicators like how many loans the institutions are giving out, how well capitalized the banks are and the quality of their credit. Perhaps most important for the market generally is what the banks’ brass have to say about the economy broadly and recession expectations. JPMorgan Chase CEO Jamie Dimon said earlier this week the U.S. will probably enter a recession in the next six to nine months and warned the S&P could fall another 20%.

Further Reading

Inflation Spiked Worse-Than-Expected 8.2% In September (Forbes)

The S&P 500 Just Did Something It Hasn’t Done Since 2018, And Guess What? It Wasn’t Good (Forbes)

Does The Fed Want You To Lose Your Job? It’s Complicated. (Forbes)

S&P 500 And Nasdaq Post New 2-Year Lows After Fed Signals Higher Unemployment May Be Necessary To Tame Inflation (Forbes)

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