U.S. stocks fall, but trade off lows, as inflation data crushes hopes Fed will slow rate rises

What’s driving markets

One of the most closely watched economic data releases of the month, the year-over-year headline number for the September consumer-price index came in at 8.2%, down from 8.3%, but higher than the FactSet consensus estimate of 8.1%.

But it was the rise in the core CPI number, which strips out volatile food and energy prices, that got the blame for the selloff, posting a monthly rise of 0.6% versus a Wall Street forecast of 0.4%. The increase in the core rate over the past year climbed to a new peak of 6.6% from 6.3%, marking the biggest gain in 40 years.

“The market’s steep drop following the data may indicate any lingering hopes of a Fed hike slowdown have been crushed,” said Mike Loewengart, head of model portfolio construction at Morgan Stanley Global Investment Office.

See: Consumer prices jump again in September and CPI shows little letup in high inflation

The data sent Treasury yields
TMUBMUSD10Y,
3.975%
surging, with the yield on the 10-year note rising more than 15 basis points toward 4.06%.

Meanwhile, traders of Fed funds futures were pricing in 96.8% odds of a 75 basis point hike at the Fed’s November meeting, up from 83% earlier Thursday before the data were released.

In addition to expectations for another jumbo interest rate hike in September, investors were also cementing strong odds of another 75 basis-point rate hike in December, with odds in the Fed funds futures market rising to more than 60%. Assuming the Fed follows through with both, they would be the fourth and fifth 75 basis-point rate hikes of the year, respectively.

“Not only is the Federal Reserve going to raise rates by 75 bps next month, but there is now a possibility that they will raise rates by another 75 bps in December,” said Chris Zaccarelli, chief investment officer for  Independent Advisor Alliance, in emailed comments.

The September report is the seventh out of nine CPI readings this year to have topped expectations, according to Michael Brown, senior market analyst at Caxton. Hot CPI readings have been responsible for some of the biggest down days for the S&P 500 so far in 2022.

Rex Nutting: The best measure shows inflation has now fallen to the Fed’s target

The U.S. dollar also strengthened after the report, with the ICE U.S. Dollar Index
DXY,
-0.64%
gaining 0.2%. Treasury yields surged, with the rate on the policy-sensitive 2-year note
TMUBMUSD02Y,
4.446%
up 16 basis points near 4.45%.

Investors also received a report on weekly jobless claims, which showed that the number of Americans filing for unemployment benefits has now increased during three of the last four weeks, although some of the rise was attributed to the impact of Hurricane Ian in Florida.

Companies in focus

• Shares of Walgreens Boots Alliance Inc.
  WBA,
  +6.29%
  rose 1.7% after the drug store and healthcare services company reported fiscal fourth-quarter profit and sales that fell but topped expectations, and raised its long-term target for its U.S. Healthcare business.

• Pfizer Inc.
  PFE,
  +1.48%
  and German partner BioNTech SE
  BNTX,
  +2.25%
  said Thursday that early data from a Phase 2/3 clinical trial of their omicron BA.4/BA.5-adapated bivalent booster showed positive results in treating individuals aged 18 and older. Pfizer shares rose 0.2%, while BioNTech’s American depositary receipts were down 0.6%.