So much for peak inflation.
US consumer prices surged to a 40-year high, defying expectations that gains would start to moderate after the Federal Reserve began tightening. Stocks sank, short-dated Treasury yields spiked and the dollar jumped on Friday as traders priced in three straight Fed rate increases of 50 basis points each.
The jaw-dropping data—an annual rate of price gains that hit 8.6% last month—drew instant reaction across Wall Street.
S&P 500 declines following hotter-than-expected inflation print
Here is what some traders and strategists are saying:
Michael Darda, chief economist and market strategist at MKM Partners, said on Bloomberg TV and Radio:
“We’re probably pretty close to peak inflation on a year-over-year basis, but none of that may matter for the path of Fed tightening, and the bond market and equity-market valuations. Because if inflation eases from here but still stays very high, then that is not an environment where the Fed just moves to the sidelines and we see some kind of huge revaluation in expensive equities that dominate the market cap of the S&P 500.”
Dennis DeBusschere, the founder of 22V Research:
“It is straightforward bad. Flat month-over-month on core means more financial conditions tightening. Powell should sound pretty hawkish next week given the tight labor market and core CPI that didn’t fall month-over-month. The reaction in the front-end was massive relative to long-end.”
Seema Shah, chief global strategist at Principal Global Investors:
“What an ugly CPI print. Not only was it higher-than-expected on almost all fronts, pressures were clearly evident in the stickier parts of the market. The decline in inflation—whenever that finally happens—will be painfully slow. The Fed’s price stability resolve is going to be really tested now. Policy rate hikes will need to relentlessly aggressive until inflation finally starts to fade, even if the economy is struggling. Any chance of a Fed put, already very low, has been ‘put’ firmly to bed.”
Jonathan Golub, chief US equity strategist at Credit Suisse, said on Bloomberg TV and Radio:
“The market has already adjusted enormously for this inflation environment. So I think that the market probably has taken all the bad news into account already which is one of the reasons why I’m not as concerned,” he said. “The market’s already discounted a ton of bad news. And most importantly, a red-hot economy does not equal recession and this is a red-hot economy not a recessionary economy.”
Peter Chatwell, head of global macro strategies trading at Mizuho International Plc:
“The classic recession trades are all in play. This reaction thus far is just knee-jerk, rather than really thinking through a) how resilient and broad-based the inflation picture is becoming and 2) therefore the extra degree of tightening that is likely to be delivered by the Fed in the near term—and how this will bring forward the risk of a recession.”
Max Kettner, chief multi-asset strategist at HSBC:
“The market reaction to the CPI data highlights the extremely tough conundrum risk assets are facing right now: if growth starts to disappoint, then both top-down growth expectations as well as earnings expectations are significantly too high. That’s unanimously bad for risk assets. If on the other hand growth remains fairly strong driven by continued strong consumer spending, then it could take a little longer for inflation to go lower. Again, this is bad for risk assets. Any Goldilocks path where growth slows down only a little but inflation falls strongly seems very unlikely—for that, inflation has simply become too broad-based and is on too high levels.”
Chris Zaccarelli, chief investment officer at Independent Advisor Alliance:
“Inflation keeps climbing and it’s becoming more entrenched. The Fed is going to face increasing pressure to get inflation under control and will need to raise interest rates by at least 0.5% for the next three meetings and by the end of the year, they are going to need to reevaluate their balance sheet reduction plans, in order to increase them. While we don’t expect a recession this year and have been positioning accordingly, there is much to be concerned about in terms of higher interest rates, higher volatility, and lower liquidity.”
Quincy Krosby, chief equity strategist at LPL Financial:
“The Fed has more work to do to rein in the kind of broad inflation that affects the average consumer, from food to gasoline and the monthly rent bill. Next week’s FOMC meeting will be especially important as markets wait to hear how the Fed expects to combat costs that are rising beyond what the average economist predicted, but what the average US consumer sees every single day. Clearly more rate hikes are coming but will the Fed bring 75 basis points on to the table for discussion?”
Chad Morganlander, senior portfolio manager at Washington Crossing Advisors:
“No great surprise. Equity investors have a hope and dream that the Federal Reserve after Q3 will pause and take a breather on rate hikes, but it’s our belief that inflation will be stubbornly high over the next several quarters. This will force investors to reconsider what the Federal Reserve as well as other monetary authorities will do.”
--With assistance from Isabelle Lee and Elaine Chen.
This article was provided by Bloomberg News.