Line chart of Implied federal funds rate in March 2023 (%) showing hot US inflation data boost expectations for Fed rate rises


US stocks steadied on Wednesday after the worst sell-off on Wall Street since June 2020, as hotter than expected inflation data fuelled bets of more aggressive interest rate rises by the Federal Reserve.

The broad S&P 500 and the technology-heavy Nasdaq Composite closed up 0.3 per cent and 0.7 per cent, respectively. The dollar index, which measures the currency against a basket of peers and which rose sharply in the previous session, slipped as much as 0.5 per cent before recovering to a 0.1 per cent decline.

Those moves came after the S&P posted its steepest drop since the early days of the coronavirus pandemic, tumbling 4.3 per cent on Tuesday on the back of a higher than forecast inflation reading for August. The Nasdaq had closed 5.2 per cent lower.

Consumer prices in the world’s largest economy rose 0.1 per cent in August from the previous month, official data showed, compared with expectations of a decline of 0.1 per cent. The annual rate came in at 8.3 per cent, down from July’s figure of 8.5 per cent but above economists’ estimates of 8.1 per cent.

The inflation report prompted investors to crank up their expectations of how aggressively the Fed would raise borrowing costs, with futures markets now pricing in a more than one-in-three chance that the US central bank will lift rates by a full percentage point this month. A move of such magnitude would follow two consecutive increases of 0.75 percentage points.

Markets are now expecting the Fed’s main interest rate to peak at about 4.3 per cent in March 2023, an increase of about 0.3 percentage points since Monday.

“Two historically outsized hikes this summer seem to have had a weaker immediate impact on the inflationary landscape than anticipated, leading markets to believe the Fed may be forced to make the hike of the century,” said strategists at JPMorgan.

US government bonds were also steadier on Wednesday after the yield on the policy-sensitive two-year Treasury note rose sharply to its highest level since October 2007 in the previous session. The yield added 0.04 percentage points on Wednesday to 3.80 per cent as the debt instrument’s price edged lower.

“Volatility and concern about higher rates will remain,” said Patrick Spencer, vice-chair of equities at Baird. “We’ve got the interest rate decision from the Fed next week and they were so hawkish at [last month’s Jackson Hole economic symposium]. That’s going to keep people on the sidelines.”

Europe’s regional Stoxx 600 share index dropped 0.9 per cent, extending losses from Tuesday’s session. London’s FTSE 100 lost 1.5 per cent, even as UK inflation data for August came in cooler than anticipated. In Asian markets, Hong Kong’s Hang Seng index closed down 2.5 per cent, while Japan’s Topix fell 2 per cent.

Fresh data on Wednesday showed that the UK’s rate of inflation eased back into single digits in August, coming in at a lower than expected 9.9 per cent year on year versus July’s figure of 10.1 per cent.

Economists anticipate that the country’s inflation rate will hover around the 10 per cent level through autumn after prime minister Liz Truss pledged to protect households from rising gas prices.

In currencies, the yen fell as low as ¥144.95 to the dollar, around its weakest level in 24 years, before rebounding after the Bank of Japan conducted a “rate check” with global banks, in what is often seen as a precursor to intervention to soothe currency volatility.



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