Stocks Plunge as Inflation Data Undercuts Wall Street’s Optimism

More recently, with a sense that the Fed’s message had been received and that a higher path forward for interest rates had been accounted for, stocks began to rise again. Even before the inflation data was released, investors had come to expect another big rate increase, of three-quarters of a percentage point, when the Fed meets next week.

Expectations are shifting again. Some investors are even starting to price in the possibility that the central bank could lift interest rates by a full percentage point, increasing borrowing costs by the most since 1984. Among them is the Japanese bank Nomura, which in just the past week has shifted from predicting the Fed would lift rates by half a percentage point, to three quarters, to a full point on Tuesday.

“We continue to believe markets underappreciate just how entrenched U.S. inflation has become and the magnitude of response that will likely be required from the Fed to dislodge it,” the analysts wrote in a research report.

The yield on the two-year Treasury note, a measure of government borrowing costs that is sensitive to changes in the expected path of interest rates, shot higher after the inflation numbers were released, rising above 3.75 percent, a fresh high for the year.

And the U.S. dollar, which had weakened for days against a basket of currencies representing major U.S. trading partners, swiftly strengthened on Tuesday, gaining 1.4 percent. Stock markets were down across Asia on Wednesday morning.

Mike Pond, the head of global inflation-linked research at Barclays, said the surprising inflation data had not altered his view that the Fed would raise rates by three-quarters of a percentage point next week.

Article source: https://www.nytimes.com/2022/09/13/business/markets-inflation-stocks.html