With yesterday’s CPI results higher than expected, and the general market taking the fall for it, it is clear that inflation is far from over. Economic indicators are waving signals of a likely increase in interest rates by one hundred basis points at the imminent FOMC meeting.
Impact Of August CPI Result
Tuesday saw the market tumble after August CPI results showed an 8.3% rise, contrary to general expectations. Stocks dumped, bonds ROI jumped, and USD skipped. Investors were disappointed to realize inflation only took another step further.
Stocks that traded high on Monday and the past week took a drastic plunge soon as the results came out. S&P 500 lowered by 4.3%, among others. Apart from stocks, cryptocurrencies also fell into a slump.
Wall Street stocks fell by 5.2%. Asia recorded losses throughout its session today. Financial markets took a steep dive as the CPI came out negative.
Luke Tilley, a Chief Economist at Wilmington Trust, said in a statement that inflation is still actively in play. He further stated that the end is not even near. Lauren Goodwin added that if the economy continues getting priced higher, soon enough, households will learn to adapt.
US Treasury revenue shot up by 3.75%, marking a new high for 2022. The yield often reacts sharply to interest rate predictions. Since this year began, yesterday saw it hit its highest. The USD picked up against other currencies after falling off recently.
Investors Alter Their Position On Basis Points
Investors had to reprise their bias regarding the FED easing up on interest rates after the CPI results showed inflation went full throttle from 8.1% to 8.3%.
CME Group revealed investors raised the stakes on Fed doubling the interest rate by one hundred percent. The exchange operator underlined a 35% wager on 100 bps by investors. Meanwhile, some investors argue that it will only go up to 75 bps.
Beforehand, traders and investors had presumed the central bank would only raise basis points to 50bps. But the turn of events caused a change in their perspectives.
Analysts concluded from the data presented by the CPI that the FED may not realize its 2% target rate anytime soon. Therefore, it needs to keep hiking interest rates until it does. Another data showed inflation peaked at a 40-year high in June.
Market participants opined that the Fed would eventually push its standard aim up to 4%. That will happen if the interest rate increases by 175bps from where it currently sits.
While the central bank sees a possibility of a 2022 closing interest rate at 4%, market participants are looking at it somewhere between 4% and 4.25%. In their opinion, the FED would remain aggressive in its fight against inflation.
FED cannot alter its methods until inflation is out of the picture.