Stocks Plunge as Strong CPI Bolsters Case for Aggressive Fed Rate Hikes

What you need to know…

The S&P 500 Index ($SPX) (SPY) on Tuesday closed down -4.32%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -3.94%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -5.54%.

Stocks on Tuesday sold off sharply, with the Dow Jones Industrials plunging to an 8-week low.  A stronger-than-expected U.S. August consumer price report Tuesday sent T-note yield soaring and stocks plummeting.  The disappointing CPI report will likely keep the Fed on track to raise interest rates by 75 bp at next week’s FOMC meeting and possibly at the November meeting.  The 10-year T-note yield jumped to a 2-3/4 month high of 3.456% after the Aug CPI report.

U.S. stock indexes Tuesday initially moved higher in overnight trading on hopes that the worst of the inflation news was behind us.  JPMorgan Chase said Tuesday that they "maintain a pro-risk stance" as a soft landing is becoming the more likely scenario for the global economy.  They added that recent data pointing to moderating inflation and wage pressures, rebounding growth, and stabilizing consumer confidence suggest the world will avoid recession.

U.S. Aug CPI rose +0.1% m/m and +8.3% y/y, stronger than expectations of -0.1% m/m and +8.1% y/y.  U.S. Aug CPI ex-food & energy rose +0.6% m/m and +6.3% y/y, stronger than expectations of +0.3% m/m and +6.1% y/y.  Still, Tuesday’s Aug CPI report of +8.3% y/y remained below June’s 40-year peak of +9.1%, and today’s core CPI report of +6.3% y/y remained below March’s 40-year peak of +6.5% y/y.

Today’s stock movers…

Mega cap technology stocks plummeted Tuesday after a disappointing U.S. Aug CPI report pushed the 10-year T-note yield up to a 2-3/4 month high.  Nvidia (NVDA) fell more than -9% to lead losers in the Nasdaq 100.  Also, Meta Platforms (META) closed down by more than -9%, and Advanced Micro Devices (AMD) closed down by more than -8%.  Intel (INTC) closed down more than -7% to lead losers in the Dow Jones Industrials.  Amazon.com (AMZN), Datadog (DDOG), Adobe (ADBE), Netflix (NFLX), and Micron Technology (MU) also closed down more than -7%.  Finally, Apple (AAPL) and Microsoft (MSFT) closed down more than -5% and posted their biggest one-day loss in 2 years.

Consumer discretionary stocks fell sharply on concern that Tuesday’s hotter-than-expected U.S. CPI report will produce more rate hikes, which could push the economy into recession.  Whirlpool (WHR) and Caesars Entertainment (CZR) fell by more than -8%.  Mohawk Industries (MHK) closed down by more than -7%, and Etsy (ETSY) and Fortune Brands Home & Security (FBHS) closed down by more than -6%.  Nike (NKE), Best Buy (BBY), and Newell Brands (NWL) closed down by more than -5%. 

Homebuilders tumbled Tuesday after the 10-year T-note yield climbed to a 2-3/4 month high, which will boost mortgage rates and dampen housing demand.  Lennar (LEN) closed down more than -7%.  Also, PulteGroup (PHM), DR Horton (DHI), and Toll Brothers (TOL) closed down by more than -6%.

Eastman Chemical (EMN) closed down more than -11% Tuesday to lead losers in the S&P 500 after it cut its Q3 adjusted EPS estimate to $2.00 from $2.46, well below the consensus of $2.60 and said that demand has slowed more than expected in August and September. 

Dow Inc (DOW) closed down more than -6% Tuesday after Jeffries downgraded the stock to hold, citing downside risk as rising interest rates further hurt consumer confidence. 

Corteva (CTVA) closed up +0.87% to lead gainers in the S&P 500 after the company announced a $2 billion share buyback program in addition to its existing $1.5 billion program.

Across the markets…

Dec 10-year T-notes (ZNZ22) on Tuesday closed down -21 ticks, and the 10-year T-note yield rose +6.6 bp to 3.424%.  Dec T-notes Tuesday tumbled to a 2-3/4 month low, and the 10-year T-note yield jumped to a 2-3/4 month high of 3.456%.  The main bearish factor for T-note prices Tuesday was the stronger-than-expected U.S August consumer price report, which virtually cements the chances that the FOMC will raise the fed funds target range by 75 bp at next week’s meeting.

T-notes recovered from their worst levels Tuesday after a sharp selloff in stocks boosted some safe-haven demand for T-notes.  Also, strong demand for the Treasury’s $18 billion auction of reopened 30-year T-bonds was supportive for prices as the bid-to-cover ratio for the auction was 2.42, above the 10-auction average of 2.33.   

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