Stocks and Bonds Quake on Jump in U.S. Inflation Rates
Stocks and Bonds Quake on Jump in U.S. Inflation Rates
S&P 500 up/down +/-2.2% month-to-date
- The August US consumer price index came in hotter than anticipated, at +3.7% y/y on the headline and at +4.3% y/y on the core.
- The Fed’s preferred “supercore” measure – core ex shelter – held steady at +4.1% y/y.
- Equity futures initially fell, as did bonds, following the August US inflation data.
.png?format=pjpg&auto=webp&quality=50&width=1000&disable=upscale)
Asked and answered: Is the fight to tame inflation done? For the Fed, "not yet."
The August U.S. consumer price index (CPI) showed gains of 0.6% month over month and +3.7% year over year on the headline and +0.3% month over month and +4.3% year over year on the core. The headline reading was a touch hotter than anticipated (+3.6% year over year expected), as was the core (+0.2% month over month expected).
How have markets reacted?
The reaction to the data was initially negative, whereby stocks and bonds across the curve initially traded lower. The negativity has been limited, with stocks off their lows and now trading higher (/ES fell from 4465 to as low as 4446.75 but was last seen at 4475.50) and Treasury yields have reversed their gains (/10Y rose from 4.316% to as high as 4.352%, before dropping to 4.292% at the time of writing).
Thus far, the mixed reaction to the report has not done much to shift Fed rate hike expectations in the near-term: yesterday, markets were pricing in an 8% chance of a 25-basis-point rate hike next week. Today, there is a 3% chance, according to Fed funds futures. As for November, the odds of a hike have dropped from 44% to 42%.
/ZQ Fed Funds Futures Forward Curve (September 2023 to December 2025)
What does the Fed do next?
The +3.7% year over year headline inflation is still above the Fed’s medium-term target of +2%—and getting further away from it. Despite uneven U.S. labor data in recent months (nonfarm payrolls have had the tendency to be revised lower in subsequent updates), Fed policymakers remain of the mindset (as Phillips Curve economic theorists) that keep monetary policy in restrictive territory is necessary in the near term.
It remains the case, however, that this may not necessarily mean more rate hikes. It could mean that interest rates stay elevated for a prolonged period. Rising rate cut odds in the first half of 2024 are unlikely to arrive barring a financial crisis or global economic meltdown.
As we’ve noted before, Fed Chair Jerome Powell has said interest rates could remain elevated for “years” – the August US inflation report does not necessarily change that calculus.
Christopher Vecchio, CFA, tastylive’s head of futures and forex, has been trading for nearly 20 years. He has consulted with multinational firms on FX hedging and lectured at Duke Law School on FX derivatives. Vecchio searches for high-convexity opportunities at the crossroads of macroeconomics and global politics. He hosts Futures Power Hour Monday-Friday and Let Me Explain on Tuesdays, and co-hosts Overtime, Monday-Thursday. @cvecchiofx
For live daily programming, market news and commentary, visit tastylive or the YouTube channels tastylive (for options traders), and tastyliveTrending for stocks, futures, forex & macro.
Trade with a better broker, open a tastytrade account today. tastylive, Inc. and tastytrade, Inc. are separate but affiliated companies.
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
tastylive content is created, produced, and provided solely by tastylive, Inc. (“tastylive”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, digital asset, other product, transaction, or investment strategy is suitable for any person. Trading securities, futures products, and digital assets involve risk and may result in a loss greater than the original amount invested. tastylive, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastylive is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparisons, statistics, or other technical data, if applicable, will be supplied upon request. tastylive is not a licensed financial adviser, registered investment adviser, or a registered broker-dealer. Options, futures, and futures options are not suitable for all investors. Prior to trading securities, options, futures, or futures options, please read the applicable risk disclosures, including, but not limited to, the Characteristics and Risks of Standardized Options Disclosure and the Futures and Exchange-Traded Options Risk Disclosure found on tastytrade.com/disclosures.
tastytrade, Inc. ("tastytrade”) is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastytrade was previously known as tastyworks, Inc. (“tastyworks”). tastytrade offers self-directed brokerage accounts to its customers. tastytrade does not give financial or trading advice, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastytrade’s systems, services or products. tastytrade is a wholly-owned subsidiary of tastylive, Inc.
tastytrade has entered into a Marketing Agreement with tastylive (“Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade. tastytrade and Marketing Agent are separate entities with their own products and services. tastylive is the parent company of tastytrade.
tastycrypto is provided solely by tasty Software Solutions, LLC. tasty Software Solutions, LLC is a separate but affiliate company of tastylive, Inc. Neither tastylive nor any of its affiliates are responsible for the products or services provided by tasty Software Solutions, LLC. Cryptocurrency trading is not suitable for all investors due to the number of risks involved. The value of any cryptocurrency, including digital assets pegged to fiat currency, commodities, or any other asset, may go to zero.
© copyright 2013 - 2024 tastylive, Inc. All Rights Reserved. Applicable portions of the Terms of Use on tastylive.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastylive’s podcasts as necessary to view for personal use. tastylive was previously known as tastytrade, Inc. tastylive is a trademark/servicemark owned by tastylive, Inc.