Breaking News
Investing Pro 0
Free Webinar - The Role of Psychology in Trading - Thursday, December 8, 2022 | 04:00PM EST Enroll Now

Analysis-Wall St outlook darkens as grim inflation report tees up more Fed hawkishness

Economy Sep 13, 2022 06:01PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
© Reuters. Traders work on the trading floor at the New York Stock Exchange (NYSE) in Manhattan, New York City, U.S., September 13, 2022. REUTERS/Andrew Kelly
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio

By Lewis Krauskopf and David Randall

NEW YORK (Reuters) -An already-murky outlook for U.S. stocks and bonds is growing darker, as sizzling inflation ratchets up expectations for how aggressively the Federal Reserve will need to raise rates.

For weeks, investors had debated whether the full extent of Fed hawkishness had been priced into markets, after the central bank already raised rates by 225 basis points this year, with many penciling in another 75 basis point rate hike at its meeting next week.

Tuesday’s hotter-than-expected inflation report - which slammed stock and bond prices - is bolstering the case for those who argue the central bank will need to be far more hawkish than anticipated in the weeks ahead. That's forcing investors to gird themselves for a potentially bigger dose of Fed tightening that has rocked asset prices all year.

The closely watched CPI report showed U.S. consumer prices unexpectedly rose in August, with such prices rising at an annual pace of 8.3%, not far from the four-decade peak reached in June.

“The Fed was already going on a tightening path in the next several months and now they have got to actually increase that given this report,” said Matthew Miskin, co-chief investment strategist at John Hancock Investment Management. “It’s pretty negative across the board for markets.”

Fed funds futures are now pricing in a roughly 36% chance that the Fed next week raises its benchmark rate by a full percentage point, a view supported by analysts at Nomura, who on Tuesday forecast a 100 basis point hike in September. Some analysts also raised expectations on how high the central bank will lift rates in coming months.

The reaction in markets was swift: the benchmark S&P 500 ended down 4.3% on Tuesday and the tech-heavy Nasdaq fell 5.2%, the biggest one-day drops for both indexes since June 2020. Yields on the benchmark U.S. 10-year Treasury note, which move inversely to bond prices, rose as high as 3.46%, the highest in about three months.

Growing expectations for Fed hawkishness are an unwelcome development for a market already contending with uncertainty on multiple fronts, from worries over whether the central bank’s inflation fight will bring in a recession to the knock-on effects of rising real yields on asset prices.

September also sees the Fed ramp up the unwinding of its balance sheet to $95 billion per month, a move some investors worry may add volatility in markets and weigh on the economy.

Phil Orlando, chief equity strategist at Federated Hermes (NYSE:FHI), said the market “at a minimum” could test its mid-June low of around 3,600.

“The market has been completely wrong in judging the inflation question,” he said. “Today ... was a massive wake-up call that forced equity investors to face reality.”


Even the time of year is to some, a source of concern: the S&P 500 has fallen an average of 0.5% in September since 1950, the worst monthly performance for the index, according to the Stock Trader's Almanac. So far for the month, the index was logging a 0.6% loss; for the year it is down over 17%.

Tuesday's inflation report put further pressure on a rebound that had seen the S&P 500 rise by 17% from its mid-June low. Stocks have now given back roughly half of those gains.

It also dashed some optimism that the Fed would soon be able to "pivot" to easing monetary policy, hopes for which has periodically helped support risk assets.

"Any impending Fed pivot isn't in front of us and this data point confirms that," said Matt Peron, director of research at Janus Henderson Investors. "The market got a little ahead of itself over the last couple of weeks with the peak hawkishness narrative."

More declines in stocks and bonds promise further pain to investors who had counted on a mix of the two asset classes to cushion market declines.

So-called 60/40 portfolios – which hold 60% of their assets in equities and 40% in bonds in anticipation that declines in one asset class will lead to gains in the other – are down more than 12% for the year to date, their worst performance since 1936, according to BofA Global Research.

Of course, many investors have been preparing for more volatility after an already rocky year so far. Fund managers increased cash balances to 6.1% in September, the highest in over 20 years, according to BofA Global Research's monthly survey released on Tuesday.

"The key question is at what point does the Fed build enough confidence that they've done enough. It’s clear that we’re not near that point now," said Ed Al-Hussainy, senior global rates strategist at Columbia Threadneedle. "On the risk asset side I think there's more damage to be done."

Analysis-Wall St outlook darkens as grim inflation report tees up more Fed hawkishness

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (1)
Bubba Born
Bubba Born Sep 13, 2022 8:04PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Anybody else tired of the Bitcoin spammers? Just another pump and dump scheme so if you want to lose money be sure and follower their advice.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
Sign up with Email