US Stock Indices Post Biggest Loss Since June 2020 on Scorching CPI Data

U.S. stock index futures are trading slightly better in Wednesday’s pre-market session after another blistering U.S. consumer inflation reading sent the major cash market averages plummeting to their worst day in more than two years and dampened investors’ expectations of a less-hawkish Federal Reserve.

At 02:25 GMT, the blue chip Dow futures are at 31314.00, up 102.00 or +0.33%. The benchmark S&P 500 Index futures contract is trading 3962.75, up 12.50 or +0.32% and the tech-weighted NASDAQ Composite is at 12147.75, up 32.00 or +0.26%.

In the cash market on Tuesday, the Dow dropped 1276.37 points, or 3.94%, to close at 31104.97, while the S&P 500 slid 4.32% to 3932.69. The NASDAQ Composite plunged 5.16% to 11633.57. All three major averages ended their respective four-day winning streaks.

Hot Consumer Inflation Report Shocks Investors

The catalyst behind Tuesday’s sell-off was a hotter-than-expected inflation report that dashed hopes that the Federal Reserve could concede and slim down its policy tightening in the coming months.

The Labor Department’s consumer price index (CPI) came in above consensus expectations, halting a cooling trend and discouraging hopes that the Federal Reserve could relent after September and ease up on its plan to aggressively hike interest rates.

The consumer price index edged up 0.1% last month after being unchanged in July. Economists polled by Reuters had forecast the CPI dipping 0.1%. In the 12 months through August, the CPI increased 8.3%. That was a deceleration from July’s 8.5% rise and a 9.1% jump in June, which was the biggest gain since November 1981. Inflation has overshot the Fed’s 2% target.

Core CPI, which strips out volatile food and energy prices, increased more than expected, rising to 6.3% from 5.9% in July.

Investors Adjusting Portfolio’s to Possible Full-Percentage Point Rate Hike

Tuesday’s steep break reflected the need by investors to adjust their portfolios to a possible full-percentage point rate hike on September. Ahead of the report, the major averages were coming off a four-day rally as investors absorbed the strong 90% probability of a 75-basis-point rate hike next week.

After the CPI data was released, the chances of a 75-basis-point rate hike fell to 66.0%, but the odds of a 100-basis-point rate hike jumped to 34.0%.

Investors will now spend the next week making further adjustments to their portfolios ahead of the Federal Reserve monetary policy meeting on September 20-21. This could create choppy trading conditions, but the bias is likely to remain to the downside.

Looking Ahead ….

Investors will now shift their focus to Wednesday’s U.S. Producer Price Index report. It is expected to show that producer inflation fell in August by 0.1%, however, given the CPI miss on Tuesday, investors are likely to stay on the sidelines until the numbers are released at 12:30 GMT. Additionally, Core PPI is expected to rise 0.3%.