Dow, Nasdaq, S&P surge after hot CPI print as Wall Street comes to terms with hawkish Fed

Investors quickly got over the shock of a hotter-than-expected CPI report, rebounding from an early swoon on Thursday to finish the session sharply higher. With inflation remaining stubbornly high, Wall Street came to terms with the fact that the Federal Reserve would likely remain in hawkish mode for the time being.

The Nasdaq Composite (COMP.IND) finished +2.2%, the S&P 500 ended +2.6% and the Dow (DJI) closed +2.8%.

The Dow Jones led the day’s advance, surging 827.87 points to close at 30,038.72. The S&P 500 advanced 92.88 points to end at 3,669.91. Meanwhile, the Nasdaq concluded trading at 10,649.15, a gain of 232.05 on the day.

Early in the session, the S&P 500 touched 3,491.58. This was the first time the index traded below 3,500 since November of 2020.

All 11 S&P sectors secured gains. this was led by more-than-4% rallies in Energy and Financials. Consumer Discretionary was the most sluggish market segment, rising by 1%.

“Today’s market reaction caused traders to scratch their heads,” BN Capital’s Leo Nelissen told Seeking Alpha. “The rebound is the result of short-covering and the related fact that a lot has been priced in. While the market is not out of the woods, it is now going the way of least resistance.”

Stocks initially reacted to the CPI data with a sharp retreat, adding to recent downswing that had seen the S&P 500 and Nasdaq finish lower for six consecutive sessions. The early drop also took the major averages to new lows for the year.

The initial slide proved short-lived, however. Shortly after the open, bargain hunters stepped in, sparking a rally that would last through most of the rest of the day.

Trading centered around the morning release of hotter-than-expected consumer price figures. CPI rose 0.4% in September, compared to the previous month, with an annual rate of 8.2%.

Meanwhile, core prices, which exclude the volatile food and energy sectors, advanced 0.6% from the prior month and 6.6% from last year. The annual pace marked the biggest year-over-year rise in 40 years.

“You had your knee-jerk reaction, everyone was positioned for the worst-case scenario and you got it. The numbers couldn’t have been any worse,” Thomas Hayes, chairman at investment management firm Great Hill Capital, told Seeking Alpha.

“This is largely supply-driven inflation unlike the 1970s which was demand-driven inflation,” Hayes noted.

The CPI data cemented Wall Street’s expectations for an aggressive Fed campaign of interest rate increases in the coming months. Traders are now pricing in a 97% chance that the central bank will raise its key rate by 75 basis points at its next meeting in November.

The remaining 3% chance represents the odds that the Fed will get even more hawkish and increase rates by a full percentage point. Currently, the likelihood of a 50-basis-point increase is nonexistent.

Compare these numbers to a day ago, prior to the CPI report, when the chances of a 75-basis-point increase stood at 85%. At that point, there was still a 15% likelihood that the Fed would take the more dovish path of a 50-basis-point rise.

A week ago, the market priced in a 25% chance that rates would rise by 50 basis points. Early last week, hope spiked that the central bank would be able to back off its most hawkish intentions and slow its interest rate increases earlier than many had feared.

That optimism has steadily fizzled since last Tuesday, with the S&P 500 marching lower in six consecutive sessions headed into Thursday’s trading. With the declines and the latest data, investors are hoping the ultra-hawkish Fed is now priced back into the market, explaining the rush of bargain hunting after the initial selloff.

Looking at action in the bond market, the 10-year Treasury yield (US10Y) climbed 5 basis points to 3.96% and the 2-year yield (US2Y) surged 19 basis point to 4.47%, after hitting new highs for the year earlier. At one point early in the day, the 10-year yield topped 4% and the 2-year yield exceeded 4.5%.

In other economic news, the government also released its weekly jobless claims data, which rose more than expected to 228K.

Looking ahead, earnings season is set to heat up on Friday, with financial giants in focus. JPMorgan, Citigroup and Wells Fargo are all set to release results.

Among individual stocks in Thursday’s trading, Albertsons rallied on reports of a possible combination with rival Kroger.

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