Rally on Wall Street after inflation data release

Yesterday on Wall Street brought the biggest volatility of stock prices in many years. All thanks to the publication of data on inflation in September, which amounted to 8,2%, while the market expected a decline to 8,1%. As a result of S & P500 index at the beginning of trade, it soared by 2,2 percent. down, then rebound by 4,8 percent. up, ending the day with an increase of 2,6 percent.

How the market interprets the US inflation data

Inflation data, similarly to the previous month, were ambiguous. On the one hand, inflation in annual terms fell from 8,3%. in August to 8,2 percent in September. However, earlier forecasts of analysts, predicting a stronger decline to 8,1%, did not come true. In monthly terms, prices increased by 0,4%, while the market expected an increase of only 0,2%. In addition, core inflation (i.e. consumer inflation, excluding the most volatile elements such as fuel and food prices) increased to 6,6%. y / y against 6,3% in August. Such an increase, driven by rising costs of services, rents and living costs, can be considered dramatic. It also indicates a high pressure on wage growth and the possibility of a wage-price spiral. In fact, inflation only fell on another drop in gasoline prices.

For the market, such information turned out to be a catalyst for the increase in volatility. The S & P500 dropped below 3500 points in the morning, which is the lowest level since November 2020. Breaking it gave investors a signal to buy and gains dominated the trading floor for the rest of the day. All in all, the S & P500 rose yesterday by 2,6 percent, the DJ30 by 2,83 percent. and the Nasdaq - by 2,23 percent. The increases were probably due to investor fatigue with a series of drops lasting as long as 7 days (such long series are rare), and the fact that all leading indicators that help in forecasting inflation, from raw materials to supply chains, real estate and the labor market, are weakening, signaling to themselves lower inflationary pressure. The market also expects moderately good, or at least not bad, results of companies for the third quarter, the publication of which starts today.

What will the Fed do?

The slower decline in inflation is another element supporting the hawkish policy FED, influencing the possibility of a stronger increase in interest rates in this cycle. Currently, the rates are in the range of 3-3,25 percent. According to the most valid scenario, the Fed will raise rates by 2 pp at its meeting on November 0,75. The same will be done in December, and in February it will end the cycle with a hike of 0,25 pp. This would mean an increase in rates to the maximum level of 4,75-5 percent.

This market disappointment with the inflation reading for September paves the way for a further collapse in the global bond market, as the yields of 10-year US bonds are to approach the level of 4% again. It may also lead to a decline in the price of tech stocks.

While inflation is falling in the US, it is rising all the time in Europe. In Poland inflation in September was 17,2 percent. Record inflation readings were also recorded in Hungary - 20,1 percent, the Czech Republic - 18 percent, and Germany - 10 percent. and the euro area - 10 percent

About the author

Pawel Majtkowski - analyst eToro on the Polish market, which shares its weekly commentary on the latest stock market information. Paweł is a recognized expert on financial markets with extensive experience as an analyst in financial institutions. He is also one of the most cited experts in the field of economy and financial markets in Poland. He graduated from law studies at the University of Warsaw. He is also the author of many publications in the field of investing, personal finance and economy.