Dow Posts Best Day Of 2022 In Wild Swing After Still-Hot Inflation Reading

Topline

Stocks shot upwards Thursday in a surprising response to data revealing stubbornly high inflation, as investors interpreted the data as a “last gasp” for inflation in one of the most volatile trading days in recent history.

Stocks broke a six-day losing streak.

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Key Facts

The Dow Jones Industrial Average rose 2.8%, or 827 points, while the S&P 500 and the tech-heavy Nasdaq gained 2.6% and 2.2%, respectively, reversing earlier losses of about 2% for each index.

That’s the Dow’s biggest increase this year on a percentage basis, though the index is still down 18% year-to-date.

Thursday was one of the most erratic days of trading of the last decade: The Dow’s 1,507-point swing was its largest intraday move since March 2020 and sixth-largest in 10 years, while the S&P and Nasdaq had their third and sixth-most volatile days of the last decade, respectively.

The Labor Department’s latest consumer price index reading revealed prices rose 0.4% from August to September, surpassing economist estimates, with prices rising 8.2% year-over-year, but Charles Schwab analyst Liz Ann Sonders told CNBC this may be the “last gasp” of higher inflation before deceleration, a sentiment shared by the market.

Investors piled into bond markets and the dollar early Thursday before backing down: 10-year U.S. Treasury note yields jumped 16 basis points to 4.06%, up nearly 50 basis points from a week ago, while the Dollar Index, which measures the dollar against a basket of six currencies, rose nearly 1%, before the yield dipped back down to 3.97% and the dollar index pared earlier gains.

Cryptocurrency also tanked initially, with bitcoin falling more than 4% after the inflation reading, before recovering to a 1% rise.

Crucial Quote

Vital Knowledge analysts wrote in a Thursday note they’re “quite confident that the economy is evolving faster than the formal gov’t statistics are capturing, and this means the inflation/Fed fears are way overblown.”

Contra

The “market reversal won’t last long,” OANDA senior market analyst Edward Moya wrote in a Thursday note, calling Thursday’s meteoric rise “a head-scratcher” given the Fed remain on a path to raise rates past 5%.

Key Background

The Labor Department released another key inflation metric Wednesday, the producer price index, which measures wholesale inflation. Producer prices rose 0.4% from August to September, surpassing a 0.2% jump estimated by economists. The stock market crashed after the release of the latest consumer price index reading, with the S&P, Dow and Nasdaq each falling by 3.9% or more, the largest single-day declines of 2022 for each index. Stocks typically fall as interest rates rise (or are expected to rise) because companies tend to become less willing to borrow money at higher rates and consumers tend to cut back spending.

Surprising Fact

Thursday breaks a six-day losing streak for all three major indexes, which marked the first time the S&P has suffered two six-day losing streaks in a calendar year since 2018.

What To Watch For

Citigroup, JPMorgan Chase, Morgan Stanley and Wells Fargo all report earnings Friday morning. The major banks’ financial results are expected to be “fairly robust,” UBS analysts Solita Marcelli and Bradley Ball wrote in a Tuesday note, but noted the market will primarily focus on recession indicators like how many loans the institutions are giving out, how well capitalized the banks are and the quality of their credit. Perhaps most important for the market generally is what the banks’ brass have to say about the economy broadly and recession expectations. JPMorgan Chase CEO Jamie Dimon said earlier this week the U.S. will probably enter a recession in the next six to nine months and warned the S&P could fall another 20%.