US stocks are crumbling after a very hot inflation has Wall Street nervous that they were too optimistic in forecasting the end of the Fed’s tightening cycle. Markets are no longer confident that the Fed will only deliver a 75bp increase this month, a half-point increase in November and a 25-basis-point increase in December. The Fed will likely have to be even more aggressive with raising rates and that is bad news for risky assets. Core inflation was scorching hot, coming in double expectations. Fed fund futures are also showing some traders might argue that they could raise rates by a full-point at the September 21st FOMC meeting.
Inflation is not easing as many were hoping. Everyone knew that the drop in gas prices should help the August inflation report but core inflation is proving to be stubbornly high. Inflation remained robust across food, shelter, medical care services, and new vehicles prices.
This inflation report killed any chance of a downward shift in Fed tightening as core goods and services pricing pressures remain hot. It doesn’t seem companies are offering significant discounts here to lower inventories.
The US dollar got its groove back after hot inflation boosts Fed rate hike expectations. It looks like the currency traders were a little too optimistic with when the Fed could start pausing their rate hiking cycle. Treasury yields are skyrocketing as investors anticipate much more aggressive Fed tightening after the hotter-than-expected inflation reading.
A scorching inflation triggered a stock market selloff that is also dragging bitcoin along for the ride. Hopes of a soft landing, the end of the Fed hiking cycle, and a resilient consumer, are fading away. Bitcoin’s plunge reminded traders it remains the ultimate risky asset and is vulnerable if stock market selloff deepens.
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