Headline Consumer Price Index inflation rose at an 8.2% annual rate in September, the Bureau of Labor Statistics reported this morning. Month-to-month inflation rose by 0.4% on a seasonally adjusted basis. The month-to-month increase was just 0.1% in August.
Core inflation, which strips out volatile food and energy prices, rose 0.6% from August and ran at a 6.6% annual rate in September.
All these numbers indicate that inflation remains elevated and is proving stubbornly resistant to increases in interest rates from the Federal Reserve intended to bring inflation back toward the central bank’s target of a 2% annual inflation rate.
Today’s news just about guarantees a 75 basis-point increase in the Fed’s benchmark interest rate at the November 2 meeting of the Fed’s Open Market Committee. The CME FedWatch tool, which calculates the odds of a Fed move by tracking prices in the Fed Funds Futures market, puts the odds of a 75 basis-point move at 97.0% today, up from 84.5% yesterday. A 75 basis point move would take the Fed’s benchmark short-term rate to 3.75% to 4.00% from the current 3.00% to 3.25% rate.
After initially tumbling on the news–the NASDAQ Composite, for example, was down 3% at the open–stocks have staged a strong rally with the Standard & Poor’s 500 up 2.26% as of 1:30 New York time and the NASDAQ Composite ahead 1.86%.
Bond prices, on the other hand, are down and bond yields are up. The yield on the 10-Year Treasury is up 3 basis points to 3.92% as of 1:30 p.m. New York time. The yield on the one-year Treasury has climbed to 4.41% and the 2-year yield is 4.40.
The move in bond prices and yields is relatively explicable on the news. The rally in stocks on what is definitely bad news needs a deeper look at market dynamics to explain. The initial drop this morning took the S&P 500 to a level where it had given back 50% of its post-pandemic rally. That looks to have triggered computers to execute buying programs. The drop also looks to have taken stock prices down to levels at which Put options bought to protect against a downturn moved into the money. Traders bought stock to cover those Puts, to take profits, and to maintain market-neutral positions.
The market trend tomorrow is likely to give us a better sense of the market reaction to the implications of today’s news on Fed interest rate policy and economic fundamentals.
Today, October 13, the S&P 500 closed up 2.60%. The Dow Jones Industrial Average gained 2.83%. The NASDAQ Composite climbed 2.23%. And the small-cap Russell 2000 index ended the day up 2.41%.
