The market prices more than 75 basis points higher rate for next week
Traders are betting that the August inflation report will force the Federal Reserve to be more aggressive in the short and long term with its rate hikes.
The Fed is expected to raise three-quarters of a point, or 75 basis points, next week. The hot CPI report now has some investors thinking a 1 percentage point increase is possible.
“Probably 75 (basis points) is the most likely play, but the market is pricing in 79 basis points. So there’s a 1 chance,” Wells Fargo’s Michael Schumacher said.
In the fed funds futures market, expectations for the terminal rate, or the rate at which the Fed is expected to stop hiking, also soared.
“It blew up. It’s 4.19 and it was at 3.99” before the CPI, Schumacher said. That means traders are betting the Fed will raise the federal funds target to 4.19% in March. The fed funds rate range is currently 2.25 to 2.5%. The market had been trading on the view that if the CPI showed moderation, the Fed could halt its rate hike early next year. The latest CPI report was a surprise on the downside, and the number of jobs was strong.
“This ends the whole fairy tale that the Fed would get three good reports in a row.” Schumacher said. “Too bad, Cinderella, it’s past midnight.”
—Patti Domm
Tech leads decline after CPI report
After inflation unexpectedly rose in August and rates rose, tech stocks led the way lower in premarket trading.
Shares of Amazon and Tesla each fell 3% in early trading. Microsoft and Alphabet each lost 2%. Nvidia lost 4%. Traders fear that higher rates will slow growth in the tech sector and expose their relatively high valuations, not to mention de-risking investors.
The declines were broad in premarket trade, with most S&P 500 stocks poised to decline. Banks were afraid that the Federal Reserve would push the economy into a recession. Bank of America and JPMorgan each lost 1.5%.
Energy stocks also fell on fears of a recession. Exxon and Chevron fell about 1%.
— John Melloy
Treasury yields soar after CPI report
U.S. Treasury yields rose on Tuesday as investors bet that a warm inflation reading will keep the Federal Reserve aggressive in tightening monetary policy.
The benchmark 10-year Treasury yield rose 7 basis points to trade at 3.43%. The yield on the 30-year Treasury note rose about 4 basis points to 3.55%.
Meanwhile, the two-year Treasury yield soared 14 basis points to 3.70%, hitting its highest level since November 2007. Yields move inversely to prices, and one basis point equals to 0.01%.
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Inflation rises 0.1% in August even after falling gas prices
The consumer price index rose unexpectedly month over month in August, even as gas prices fell, the Bureau of Labor Statistics reported.
The index gained 0.1% for the month and rose 8.3% year-on-year. Economists polled by the Dow Jones expected a month-on-month decline of 0.1%.
Core CPI, which strips out volatile food and energy costs, rose 0.6% from July and 6.3% year-on-year.
-Jeff Cox
Stock futures reverse, fall after inflation report
A surprisingly hot CPI report led to a sharp reversal in stock futures. Dow futures, which were up more than 200 points just before 8:30 a.m., were down more than 300 points after the release. Nasdaq 100 futures saw a negative change of almost 3%.
– Jesse Pound
Stocks face near-term risks as earnings estimates take a hit, says Bernstein
According to Bernstein, headwinds and investor pessimism present a downside risk for stocks, especially in Europe.
Strategists Sarah McCarthy and Mark Diver said in a note to clients on Tuesday that earnings estimates in Europe could be cut by 10% or more, putting pressure on stocks.
“The European market is up 4% since the start of September, but is down 13% year to date (in local currency terms). We expect further declines in the near term as in our view a) the down cycle of earnings must continue. ib) we expect further outflows from equity funds. Sentiment measures are not yet pessimistic enough to take a bullish stance on short-term positive returns,” the note said.
Europe is not the only area showing weakness. The Bernstein note also said global equity funds have seen three straight weeks of outflows.
– Jesse Pound, Michael Bloom
Treasury yields fall ahead of the CPI
US Treasury yields retreated on Tuesday morning less than an hour before the release of a key inflation report.
The yield on the benchmark 10-year bond and 2-year Treasury were lower by about 5 basis points each, trading at 3.314% and 3.525%, respectively. The yield on the 30-year Treasury note fell about 4 basis points to 3.477%.
Bond yields move inversely to price, and one basis point is equal to 0.01%.
Treasury yields rose in September as Federal Reserve officials vowed to continue their fight against inflation, even if it hurts the economy in the short term.
– Jesse Pound
Stay away from Rent the Runway, says Barclays
Barclays downgraded Rent the Runway shares to neutral from outperform, citing concerns about the company’s active subscriber growth.
“The significant deterioration in active client trends during the quarter (sub active growth for the quarter slowed to -8% in 2Q vs Street +7%, decelerating from +17% in 1Q) suggests that RENT is more susceptible to macro pressure on the aspirational consumer than we expected,” analyst Michael Binetti wrote in a note.
Shares of Rent the Runway fell more than 22% in premarket after the company announced it was laying off 24% of its corporate workforce.
—Sarah Min
The dollar falls for the fifth day in a row
The dollar index, which tracks the U.S. currency against six other currencies, fell for a fifth straight day, which could give stocks a boost. Many large US companies derive a large portion of their revenue from outside the US, meaning a weaker dollar could boost their revenue.
The index was down 0.5% at 107.76.
Chinese EV maker BYD may gather nearly 40%
BYD, a Chinese electric vehicle maker, could make big profits in the future, according to Barclays.
“BYD (Build Your Dream) became the world’s No. 1 electric vehicle maker in terms of deliveries in 2Q22, dethroning Tesla from that pedestal for the first time, and its revenue growth rate of three single digits to continue through the rest of 2022, despite its already sizeable base,” analyst Jiong Shao wrote in a note on Tuesday.
The analyst also has a $40 per share price target on the stock, implying a 38% upside from Monday’s close.
CNBC Pro subscribers can read the full story here.
—Sarah Min
UK unemployment hits 48-year low, while real wages fall sharply
UK unemployment fell to 3.6% in the three months to July, its lowest level since 1974.
The economic inactivity rate, meanwhile, rose 0.4 percentage points to a five-year high of 21.7%.
The Office for National Statistics attributed the change to an increase in long-term illness designations and students leaving the workforce. The growing tightening of the labor market may fuel further inflationary pressure and cause headaches for the Bank of England.
Annual growth in real wages, adjusted for inflation, excluding bonuses, fell by 2.8% in the three months to the end of July.
“It’s understandable that people will look to their employers for help during the cost of living crisis, while Andrew Bailey will be hoping that companies don’t raise wages too quickly and inflation compounds,” said Marcus Brookes, chief investment officer at Quilter Investors.
“However, the UK must prepare for public sector discontent with pay strikes continuing as budgets are stretched.”
– Elliot Smith
UBS Plans to Increase Dividend; stocks rise ahead of the market
UBS Group plans to raise its dividend by 10% to $0.55 a share and expects share buybacks in 2022 to exceed $5 billion, the Swiss bank said on Tuesday.
UBS shares were up 1.2% in pre-market activity after what ZKB analyst Michael Klien called surprise news.
Read more here.
— Reuters
European shares are up slightly
European shares rose cautiously on Tuesday morning as global markets braced for the latest US inflation reading.
The pan-European Stoxx 600 rose 0.3% in early trade, with food and drinks shares adding 0.8% to gain as most sectors and major bourses entered positive territory. Retail inventories fell 0.4%.
CNBC Pro: Want to invest in real estate? These REITs are among analysts’ favorites
Real estate investment trusts (or REITs) are returning to the spotlight after a volatile year for many asset classes.
Analysts at Morgan Stanley and Citi highlight REITs in two sectors that they say could outperform the broader market and remain resilient in a downturn.
CNBC Pro subscribers can read more here.
– Weizhen Tan
Fed actions this month could be ‘non-event’ for asset prices, Ameriprise says
The upcoming Federal Reserve meeting in September, where the central bank is expected to raise interest rates, is likely already priced into the market, according to Anthony Saglimbene, chief market strategist at Ameriprise.
“In our view, central bank actions this month are unlikely to be an event for asset prices,” he wrote in a note on Monday. “However, incoming economic data over the coming weeks and months and its influence on political actions next year could play a much larger role in shaping the direction of stocks over the medium term.”
Markets now expect the Fed to raise rates by 0.75 percentage points, meaning assets may not move much if that is the central bank’s decision. A consumer price index report on Tuesday that is in line with expectations may not move the needle either.”
“Unless last month’s inflation numbers have changed substantially more than expected, including Wednesday’s update on August’s producer price index (PPI), we believe a 75-point rise The Fed’s fundamentals are essentially locked in at this point,” he said.
—Carmen Reinicke