Brutal sell-off pushes U.S. stocks down the most since June 2020
Rising inflation fears have ripple effects, causing Canada's main index to decline
A broad-based sell-off sent U.S. equities to their worst day in more than two years after hotter-than-expected inflation data fuelled bets on a jumbo hike by the Federal Reserve next week. Treasury yields surged and the U.S. dollar gained.
Across-the-board selling sent the S&P 500 down more than four per cent, while the tech-heavy Nasdaq 100 losses surpassed five per cent as yield-sensitive stocks took the biggest hit. Both benchmarks notched their biggest oneday percentage drops since June 2020 during the throes of the COVID -19 pandemic. Swaps traders are now fully pricing in an interest-rate increase of three-quarters of a percentage point, with wagers rising for a similar move in November and policy rates ultimately reaching around 4.3 per cent early in 2023.
In New York, the Dow Jones industrial average was down 1,276.37 points at 31,104.97. The S&P 500 index was down 177.72 points at 3,932.69, while the Nasdaq composite was down 632.84 points at 11,633.57.
Canada's main stock index also took a hit on the U.S. inflation report, posting its biggest decline in nearly three months. The Toronto Stock Exchange's S&P/TSX composite index ended down 341.83 points, or 1.7 per cent, at 19,645.40, its biggest decline since June 16. It follows four straight days of gains.
With the exception of the U.S. dollar, almost everything was in the red. Stocks and bonds suffered another concerted sell-off. Two of the biggest exchange-traded funds tracking the S&P 500 and Treasuries posted a combined loss of 4.8 per cent, marking the worst cross-asset retreat since mid-june.
Oil slipped as concern resurfaced that the central bank may hasten its monetary tightening, putting the economy at risk of a recession. Bitcoin was not spared by the sweeping sell-off, despite being touted as an inflation hedge. The digital coin slipped almost 10 per cent Tuesday, snapping a four-day advance.
The two-year U.S. Treasury yield, the most sensitive to policy changes, jumped as much as 22 basis points, pushing it more than 30 basis points above the 10-year rate and deepening an inversion in what is generally a recession warning.
The synchronized retreat highlights a signature hazard of 2022's markets, that everything is at risk of moving in lockstep. The obsession with economic data has contributed to spike in a measure of cross-asset correlation tracked by Barclays Plc, with recent readings ranking among the highest of the past 17 years.
“This market is very tough, both ways,” said Michael Purves, founder of Tallbacken Capital Advisors. “Whether you were bullish the euro, Treasuries or equities, you got smoked today.”
The consumer price index increased 0.1 per cent from July, after no change in the prior month, Labor Department data showed Tuesday. From a year earlier, prices climbed 8.3 per cent, a slight deceleration but still more than the median estimate of 8.1 per cent. So-called core CPI, which strips out the more volatile food and energy components, also topped forecasts.
“Overall, today was a surprising day against the trend of what had appeared to be some moderation across most indicators of growth and pricing pressure, so the Fed's job is clearly not finished,” Rick Rieder, the chief investment officer of global fixed income at Blackrock Inc., the world's biggest asset manager, wrote. “We think the Fed will pause the rate hiking cycle potentially at year-end, but maybe now the central bank will have to wait a bit longer to do that after having reached a restrictive policy stance.”
“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,” Seema Shah, chief global strategist at Principal Global Investors, said in a note. “In fact, 70 per cent of the CPI basket is seeing an annualized price rise of more than 4 per cent month-on-month. Until the Fed can tame that beast, there is simply no room for a discussion on pivots or pauses.”
Matt Peron, director of research at Janus Henderson Investors, said the CPI report was “an unequivocal negative for equity markets.
“The hotter than expected report means we will get continued pressure from Fed policy via rate hikes,” he said in a note. “It also pushes back any `Fed pivot' that the markets were hopeful for in the near term.”
Peter Tchir, head of macro strategy at Academy Securities was in a buying mood. “I'd buy this dip,” he said “There are bigger issues facing us, but this seems like an algo driven response to the data, chasing out recent weak longs, so I'm a buyer of stocks and bonds here.”
Sweeping losses are a reversal from the previous four sessions, when investors appeared to position for a reading that showed an easing in inflationary pressure. They snapped up stocks and sold the dollar, while keeping front-end Treasury yields in check.
Tuesday's turmoil was a flashback to August, when markets endured the worst cross-asset sell-off in decades. And it ended a period of brief market calm in September, a month that historically has ranked among the worst for stocks.