Stocks finished sharply lower Tuesday, while Treasury bond yields surged and the dollar raced higher against its global peers, following a surprisingly fast reading for August inflation that has rekindled bets on big Fed rate hikes over the coming months.
Stocks futures had, in fact, been trading in the green ahead of the pivotal August reading of domestic inflation as investors looked for indications of peak price pressures in the U.S. economy, thanks in part to tumbling gas prices and the unravelling of supply chain disruptions.
The headline consumer price index for the month of August was estimated to have risen 8.3% from last year, down from the 8.5% pace recorded in July but faster than the Street consensus forecast of 8.1%.
So-called core inflation, which strips-out volatile components such as food and energy prices, rose 0.6% on the month, and 6.3% on the year, the report noted, with both the annual and monthly reading coming firmly north of Street forecasts.
"Markets were jolted by a nasty CPI print this morning and are responding in kind. Misses on both headline and core are disappointing as this bout of inflation proves to be anything but 'transitory'", said Cliff Hodge, chief investment officer for Cornerstone Wealth in Charlotte, North Carolina.
"Price gains were pervasive, with more than 70% of the CPI basket rising by at least a 4% annualized rate," he added. "Unfortunately for markets this print will reinforce the need for the Fed to remain aggressive and will likely keep a lid on risk assets over the foreseeable future."
The Federal Reserve's resolve in both fighting the impact of the fastest inflation in four decades, as well as its reluctance to believe in moderating CPI levels without "compelling" evidence of a downturn, will likely mean Tuesday's data has little effect on the size of next week's interest rate hike.
The CME Group's FedWatch, in fact, still suggests an 80% chance of a 75 basis point rate hike, the third in succession, with traders pricing in the likelihood of a Fed Funds rate that could top out at 4% by early next year.
However, bigger hikes are now being priced in, as well, including a 20% chance of a 100 basis point move higher next week.
That could be why the dollar index, which tracks the greenback against a basket of its global peers, reversed its earlier declines, rising 1.53% following the data release to 109.86 as 2-year Treasury note yields surged to 3.754%.
A weaker-than-expected auction of $32 billion in new 10-year notes yesterday suggested investors remain uneasy about growth and inflation prospects, as foreign buyers backed away from the sale and overall demand slumped to a multi-month low.
On Wall Street, the S&P 500 ended down 4.32%, while the Dow Jones Industrial Average tumbled 1,276 points, or 3.94%, to 31,104. The tech-focused Nasdaq sank 5.16%.
Oracle Corp. (ORCL) shares fell 1.31% after the cloud-focused software group posted weaker-than-expected first quarter earnings but forecast solid near-term revenues.
Peloton Interactive (PTON) shares fell 10.3% after the connected fitness group said co-founders John Foley and Hisao Kushi would leave the group as part of its broader restructuring effort.
Starbucks (SBUX) shares fell 1.38% ahead of the group's much-anticipated investor day presentation, the first under new CEO Laxman Narasimhan, later in the session.
