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Wall Street reacts to August’s shock inflation data

Wall Street reacts to August’s shock inflation data

The latest Consumer Price Index (CPI) released Tuesday showed an 8.3% annual climb in August and a 0.1% increase over the prior month, the Bureau of Labor Statistics said Tuesday, as inflationary pressures moderated less than expected by investors.

August’s CPI data affirmed to market participants that the Federal Reserve will likely remain aggressive in its monetary tightening campaign to restore price stability, news that sent stocks lower on Tuesday.

Following this report, data from the CME Group showed investors pricing in an 82% chance of a 0.75% rate hike next week and an 18% chance of a full percentage point hike.

A flood of reactions from Wall Street strategist poured into our inboxes Tuesday morning follow the higher-than-expected print. Yahoo Finance rounded up some of what we got below:

Ian Shepherdson, Chief Economist, Pantheon Macroeconomics

Fed officials have made it very clear that they will not slow the pace of rate hikes until they see convincing evidence that core inflation pressure is easing on a sequential basis. These data mean that the chance of a 50bp hike next week has gone. But the 20% chance of a 100bp hike now priced-in looks over-the-top.

Paul Ashworth, Chief North America Economist, Capital Economics

The 0.6% m/m increase in core consumer prices in August, double the consensus expectation, confirms that the Fed will hike its policy rate by at least 75bp next week. Nevertheless, that outsized monthly gain in underlying prices, which took the annual core inflation rate up to a new cyclical high of 6.3%, from 5.9%, is somewhat hard to square with all the other evidence pointing to signs of price pressures easing. We can see disinflation everywhere except in the official CPI statistics.

Kathy Bostjancic, Chief US Financial Economist, Oxford Economics

The Fed’s “unconditional” commitment to lower inflation amid the still strong labor market will lead to further aggressive policy tightening. We continue to look for the Fed to raise rates another large 75bps on September 21, followed by an additional 75bps of rate hikes by year-end. This would raise the mid-point of the fed funds rate range to 3.88%. However, if inflation remains very rapid, it raises the risk of the Fed doing more tightening.

U.S. Federal Reserve Chair Jerome Powell testifies before a Senate Banking, Housing, and Urban Affairs Committee hearing on the Fed's

U.S. Federal Reserve Chair Jerome Powell testifies before a Senate Banking, Housing, and Urban Affairs Committee hearing on the Fed’s “Semiannual Monetary Policy Report to the Congress,” on Capitol Hill in Washington, U.S., March 3, 2022. REUTERS/Jonathan Ernst/Pool

Ron Temple, Head of U.S. Equities, Lazard Asset Management.

Putting a lid on escalating shelter costs is the lynchpin to taming inflation. Unfortunately for the Fed, rental rates don’t respond quickly to rate hikes. Meanwhile, consumers are caught in a vice, as rents spiral and the cost of home ownership moves further out of reach. Despite the sharpest tightening of monetary policy in decades, the Fed still has more heavy lifting ahead. Investors should brace themselves for even higher rates than they anticipated before today’s release.

Richard Saperstein, chief investment officer, Treasury Partners

Markets continue to underestimate the resiliency of inflation and Fed policy response. After years of Fed suppressed interest rates and quantitative easing, markets will now be forced to navigate the reversal of these policies and that is primarily what is driving the recent market volatility. While a September rate hike is priced in, the tension between future Fed rate increases vs. inflation levels will create ongoing volatility that investors should brace for. Effectively the Fed will focus on a single mandate, inflation, which will result in reduced economic growth and a lowering of earnings expectations. This will weigh on market multiples.

Gregory Daco, Chief Economist, EY Parthenon

The correction in gas prices in August was significant, with prices at the pump down 25% since their most recent June peak, but electricity and natural gas prices rose strongly reflecting climate disruptions and greater international demand for natural gas. Inflation remains broad-based and the sequential momentum for core CPI portends to only a very gradual easing of inflationary dynamics. In the context of this global central bank tightening cycle, higher and more persistent inflationary pressures increase the risk of a hard landing.

Cliff Hodge, Chief Investment Officer, Cornerstone Wealth

Markets were jolted by a nasty CPI print this morning and are responding in kind. Misses on both headline and core are disappointing as this bout of inflation proves to be anything but ‘transitory.’ Price gains were pervasive, with more than 70% of the CPI basket rising by at least a 4% annualized rate. Unfortunately for markets this print will reinforce the need for the Fed to remain aggressive and will likely keep a lid on risk assets over the foreseeable future.

Mike Loewengart, Head of Model Portfolio Construction, Morgan Stanley

Today’s CPI reading is a stark reminder of the long road we have until inflation is back down to earth. Wishful expectations that we are on a downward trajectory and the Fed will lay off the gas may have been a bit premature. The market has been on a winning streak these last few days so it shouldn’t be a surprise to see it take a breather as investors come to the realization that inflation may remain elevated for longer.

Gargi Chaudhuri, Head of iShares Investment Strategy Americas, BlackRock

When we first started to see inflation rise after the pandemic, price increases were concentrated on goods. More recently, inflation has been driven by services while goods have seen some cooling because of rising inventories and declining consumer demand. We believe this dispersion is likely to continue, with shelter inflation expected to increase more and as wage growth remains robust.

Seema Shah, Chief Global Strategist, Principal Global Investors

Today’s inflation data cements a third consecutive 0.75% increase in the Fed funds rate next week. Headline inflation has peaked but, in a clear sign that the need to continue hiking rates is undiminished, core CPI is once again on the rise, confirming the very sticky nature of the US inflation problem. In fact, 70% of the CPI basket is seeing an annualized price rise of more than 4% month-on-month. Until the Fed can tame that beast, there is simply no room for a discussion on pivots or pauses.

Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc

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