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Why CPI data is such a big stock-market mover this year

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Another consumer-price index, another big market move.

U.S. stocks mounted a remarkable turnaround on Thursday with the Dow Jones Industrial Average surging nearly 1,500 points from peak to trough, after a sharp selloff early in session sparked by hotter-than-expected U.S. inflation data.

The consumer-price index increased 0.4% in September, higher than the 0.3% consensus forecast polled by Dow Jones, according to the Bureau of Labor Statistics. Excluding volatile food and energy prices, the core CPI is even more worrisome, jumping a sharp 0.6% against the estimate of a 0.4% increase. 

“They’re just not good news,” said Chris Campbell, chief policy strategist at Kroll. “What they (Federal Reserve) have done has not yet worked, so they brought out the big guns by raising interest rates, and more of the smaller guns by instituting quantitative tightening, but even those two together have not borne fruit.”

The hotter-than-expected inflation report sent three stock indexes tumbling early in the session with the S&P 500
SPX,
+2.60%

plunging 2.4% to its lowest level since November 2020, but the large-cap index finished 2.6% higher led by gains in energy and financials stocks, a swing of over 5% in total. It was also the first time on record that the Dow has risen at least 800 points in the same trading day that it was down at least 500 points at its low, according to Dow Jones Market Data.

See: Dow ends over 800 points higher as stocks stage massive turnaround after hot inflation reading

Michael Landsberg, chief investment officer at Landsberg Bennett Private Wealth, said what happened to stocks this morning was just a “knee-jerk reaction” and “you (stock market) are going to have to bounce here, but the trend is lower.”

Hot inflation readings have been responsible for some of the biggest declines for the S&P 500 occurring on or around CPI reporting days in 2022. Two of the S&P 500’s nine largest down days this year have come on days when CPI data was released, noted Nicholas Colas, co-founder of DataTrek Research. Without those nine down days, the S&P 500 would have been up 8.6% year-to-date through the end of last week, he wrote.

See: What stock-market investors will be watching in Thursday’s U.S. inflation report

Why is the CPI data so moving?

The Federal Reserve has made getting a grip on inflation its objective.

“The Fed is to become more aggressive in their stance and those aggressive moves have a significant impact on the economy and (on) public and private markets and what everyday Americans probably live their lives,” said Campbell. “Slowing down the economy, there might be slowing down inflation and [that] also typically comes with a reduction in jobs. It comes with a decrease in wages. All of those issues deeply impact many hard working Americans.” 

According to the CME Group’s FedWatch tool, as of Thursday afternoon, market participants priced in 96.6% odds of another 75 basis point hike at the Fed’s Nov. 1-2 meeting, and a 3.4% probability that the Fed will increase rates by 100 basis points.

See: Hot U.S. inflation is boosting market expectations for a 5% or higher fed-funds rate in a matter of months

Landsberg said the reason behind selloffs on CPI reporting days isn’t down to just the inflation data itself, but the fact that when investors see disappointing report, it tells them that the Fed is not stopping anytime. 

“We don’t really have inflation coming down meaningfully in the middle of next year,” Landsberg said, killing the notion the Fed is set to pivot away from its aggressive tightening pace.

The Dow Jones Industrial Average 
DJIA,
+2.83%

 rose 2.8%, posting the largest one day percentage gain since Nov. 9, 2020, after dropping nearly 550 points at its session low. The Nasdaq Composite climbed 2.2%.

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