Stocks Tumble After Hotter-Than-Expected August Inflation Data

3:14 pm Tuesday, September 13th, 2022

Today’s trade is distinctly negative as the major indices log sizable losses. Stocks are retreating following hotter-than-expected August inflation data, which is in contrast to the peak inflation narrative and feeds worries about the Fed’s rate hike path. Broad selling brought the S&P 500 and Nasdaq Composite below their respective 50-day moving average, and the S&P 500 broke meaningfully below the 4,000 level.

Selling interest in the stock market was precipitated by rising Treasury yields, which jumped sharply on the heels of the CPI report. The 2-yr note yield, which was at 3.50% before the release, sits at 3.76% now. The 10-yr note yield, which was at 3.30% before the release, sits at 3.44% now.

The weakening dollar had been an important support factor for the recent gains, but the US Dollar Index shot higher after the CPI data. It’s now up 1.2% to 109.66.

Rate hike expectations also shifted noticeably to the upside. The fed funds futures market is now pricing in a 22.0% probability of a 100 basis point rate hike at the September 20-21 FOMC meeting compared to a 0.0% probability yesterday, according to the CME FedWatch tool. In other words, there is now a 100% probability of a 75 basis point rate hike at next week’s FOMC meeting.

Separately, a fund manager survey by BofA revealed the highest cash level (6.1%) since 2001 and a record-low share of fund managers taking higher risk than normal. That extreme bearish-minded positioning is considered to be a contrarian indicator, but thus far the stock market’s performance has been dictated by the disappointing CPI report.

The sell off is indiscriminate thus far. Mega cap and growth stocks are at a slight disadvantage compared to their peers, but the broad selling efforts are bringing many stocks down. The Vanguard Mega Cap Growth ETF (MGK) is down 4.0%; the Invesco S&P 500 is down 2.7%; the Russell 3000 Growth Index is down 3.6%; the Russell 3000 Value Index is down 2.6%.

Market breadth reflects strong conviction on the sell side as decliners lead advancers by a 9-to-1 margin at the NYSE and a greater than 4-to-1 margin at the Nasdaq.