Stock market suffers its worst day in more than two years following inflation number

On Tuesday, the Labor Department reported the CPI index rose by 8.3% last month from a year earlier and core CPI, which excludes food and energy, increased by 6.3% over the same period. Both inflation data exceeded forecasts, and likely assure another historically large interest-rate hike from the Fed next week.

All measures came in above forecasts. Shelter, food, and medical care were among the largest contributors to price growth. The acceleration points to a stubbornly high cost of living for Americans, despite some relief at the gas pump. Food costs increased by 11.4% from a year ago, the most since 1979. Electricity prices rose by 15.8% from 2021, the most since 1981. Overall shelter costs increased by 0.7% since July and 6.2% since a year ago, both the most since the early 1990.

The Dow fell nearly 1300 points Tuesday. All three indices posted their steepest one-day losses since June 11, 2020. The yield on the benchmark 10-year US Treasury note jumped to 3.422% from 3.361% on Monday. The dollar rallied Tuesday with DXY increasing by 1.4%, its largest one-day gain since March 2020. The markets estimated that the Fed would raise its benchmark rate by 75 bps for the FOMC meeting scheduled for September 20 and 21. There is also a 34% probability of a 100-bps increase at that meeting, up from a 0% chance on the previous day.

Some market participants believe the Fed might take an aggressive approach to tame the long-lasting inflation. Lawrence Summers, a former Treasury secretary who has frequently criticized Fed policy, said on Twitter that:

While some are concerned that another hawkish move would have an unexpected impact on the economy and overall market, ‘Bond King’ Gundlach is worried the Fed will choke off economic growth by raising interest rates too fast. He said that he would prefer just 25 basis points due to concerns about potential oversteer. Elon Musk said on Twitter that the Fed should turn to cutting rates by 0.25%, reiterating his concerns about deflation following the Fed’s aggressive monetary policy. Cathie Wood, head of investment firm Ark Investment Management, cited similar fears over lower future prices.

#1. US railroads and unions reach tentative pact

• US railroads and unions reached a tentative deal early Thursday, a breakthrough that looks to avert a labor disruption that risked adding supply-chain strains to the country. 

• The tentative freight-rail agreements include a 24% wage increase over five years, 2020 through 2024, including 14.1% effective immediately, as well as five annual $1,000 payments.

• The deal extends the so-called cooling off period — during which the unions may not strike — for several weeks, to give the unions time to ratify the agreement, and it now goes to union members for a ratification vote.

#2. Mortgage rates hit above 6% for first time since 2008

• Mortgage rates have been on the rise since the start of the year as the Fed affirmed its commitment to tame soaring inflation.

• The average rate on a 30-year fixed-rate mortgage was 6.02% as of Thursday, up from 5.89% the week before. The average rate for an identical loan was 2.86% the same week in 2021.

• Mortgage demand from homebuyers fell 29% since last year, and dropped 1.2% last week compared with previous week.

#3. Big tech companies facing billions in fines and tough laws

• A European court on Wednesday rejected Google’s appeal against a roughly $5 billion antitrust fine as the company is criticized for dominating markets by elbowing out rivals.

• Meanwhile, California’s attorney general filed an antitrust lawsuit against Amazon on Wednesday, claiming the retailer stifles competition and increases the prices that consumers pay across the internet.

#4. Adobe shares drop after the company announces plans to acquire Figma

• Adobe agreed to buy collaboration-software company Figma for around $20 billion and will pay for the company using roughly half cash, half stock.

• Adobe also reported Q3 net income of $1.14 billion on revenue of $4.43 billion, a 13% increase year-over-year, while its Q4 revenue guidance fell below market expectations, citing foreign-exchange headwinds tied to the run-up in the US dollar.

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