Yesterday, September 13, stocks plunged in disappointing inflation news for August. The annual inflation rate did indeed drop to 8.3% from 8.5% in July and 9.1% in June, but the drop was less than the 8.1% expected by economists.
And stocks dropped like a stock. The Standard and Poor’s 500 fell 4.32% on the day and NASDAQ Composite dropped 5.16%. The BIG TECH-dominated NASDAQ 100 was lower by 5.54%.
Today, as of the close in New York, the market has restored some equilibrium. The S&P 500 was up 0.34% and the NASDAQ Composite was ahead 0.75.%
It’s still early but so far at least investors and traders have decided not to panic today.
Which certainly wasn’t the case yesterday.
I’ll leave it to you to decide if a 5.54% drop in the NASDAQ 100 is a measured reaction to inflation running 20 basis points hotter than projected. (Amazon (AMZN) fell 3.06%, Apple (AAPL) was down 5.87%, Applied Materials (AMAT) was lower by 6.14%, and Nvidia (NVDA) plunged 9.47%.)
But I sure caught a whiff of panic in Wall Street calls for the Federal Reserve to raise interest rates by a full 1.00%–and not the widely anticipated and dreaded–0.75% at the September 21 meeting of the Fe’s Open Market Committee.
For example, yesterday economists at Nomura said they now expect a 100 basis-point move on September 21 and a terminal rate of 4.50% to 4.75% benchmark interest rate by February 2023. (Prior to yesterday’s inflation news, the number most frequently bandied about was a 4.00% peak in for the Fed rate.)
Or this also yesterday: “Don’t be surprised if the Fed’s hand is forced” and they end up doing 100 basis points of tightening, said Nisha Patel, director and portfolio manager of fixed income at Parametric.
The CME Fed Watch Tool, which uses prices in the Fed Funds Futures market to calculate the odds of a Fed move, today puts the odds of a 75 basis points increase at 74%. That’s down from a 91% odds before the inflatin numbers.
Where did those 17 percentage points between yesterday and today go? Not to the chances of a 50 basis point increase. Odds for that are at 0% today, down from 9% yesterday.
The big new position is an increase in the odds of a 100 basis point increase to 26% today from 0%.
(For a bit of context a “normal” Fed move is 25 basis points. A 50 basis point move was, once upon a time, seen as a big deal. And 75 basis points was an extraordinary message.)
I’d expect that over the week before the Fed meeting the odds of a 75 basis point increase will climb and the odds of an extraordinary 100 basis point increase will fall. That move would be likely to push stocks somewhat higher. And the announcement of a 75 basis point increase–so scary in prospect just a week ago–would be treated with relief.
In the bond market the yield on the 10-year Treasury was up 1 basis point to 3.41% as of 1 p.m. New York time. The yield on the 5-year Treasury was down slightly at 3.60% from yesterday’s 3.62%. The yield on the 2-year Treasury was 3.76% down from 3.79% yesterday.
