Stocks Surge in Wild Ride After CPI Data Selloff: Markets Wrap

(Bloomberg) — US stocks roared back from losses sparked by a hot inflation reading on speculation the yearlong selloff had potentially reached a bottom.

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The S&P 500 closed up 2.6% after swinging more than 5% during a wild trading day. The benchmark clawed back more than 40% of the losses over a six-day selloff that took it to a two-year low.

Technical levels factored into the bounce. At one point, the benchmark S&P 500 had given back 50% of its post-pandemic rally, triggering programmed buying. A wave of put options bought to protect against such a rout moved into the money, and as profits were booked, that prompted dealers to buy stocks to remain market neutral.

A gauge of consumer price growth rose to a 40-year high last month, sealing the case for the Fed to deliver a large rate hike in November. Stocks plunged 25% this year before Thursday’s rebound, as the central bank tightened policy to curb inflation, leaving investors to weigh how much damage is left for share prices.

“There may be some short covering going on, but also, a lot was priced in,” said Michael Contopoulos, director of fixed income at Richard Bernstein Advisors. “There has likely been a fair amount of defensive positioning lately in equities and on the rates side, higher policy rates means higher probability of a hard landing.”

Read more: Big Hedges, 50% Charts, Okay Earnings: Behind the Stock Bounce

Read more: Hot Inflation Torches Bears in a Stock Reversal for the Ages

Risk assets have been under pressure all year as central banks around the world attempt to tame runaway inflation. The latest data added to evidence the harsh monetary medicine has yet to take hold and comes on the heels of last week’s payrolls figures that showed unemployment rate at a five-decade low in September.

The Treasury curve flattened, with the yield on policy-sensitive two-year notes up 18 basis points at 4.47%. Market bets on rates now lean toward back-to-back 75 basis-point hikes at the next two Fed meetings and expect the central bank to push rates past 4.85% before the tightening cycle ends. The current rate is 3.25%.

On the earnings front, Delta Air Lines Inc., Domino’s Pizza Inc. and Walgreens Boots Alliance Inc. gained on better-than-expected results. Big banks including JPMorgan Chase & Co. and Citigroup Inc. are due to report on Friday.

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“If you had some levered CTA who had a big buy program set to start around 3,505 and then another levered short who doubled down on the CPI print that could have created this snowball where market just ripped as other levered technical systematic traders piled in,” Max Gokhman, chief investment officer for AlphaTrAI, said. “Or someone just got a fat margin call. We may find out after the dust settles.”
“There’s so much uncertainty in the market and so many data points are conflicting that the market responds to whatever is the most recent data point,” said Ellen Hazen, chief market strategist and portfolio manager at F.L.Putnam Investment Management. “So this morning with the reversal in the UK the market was up pre-open, then we got CPI and then it was down. And then we look at the fact that we bounced off of this support level and that becomes self-fulfilling.”
“This isn’t the CPI report markets or the Fed were hoping for,” said James Athey, investment director at abrdn. “Inflation pressures remain stubbornly high. The reality is that for the foreseeable future the Fed is locked into a stance of unequivocal hawkishness. This will support bond yields and the US dollar but its yet more bad news for equities.”
“After today’s inflation report, there can’t be anyone left in the market who believes the Fed can raise rates by anything less than 75bps at the November meeting,” Seema Shah, strategist at Principal Global Investors wrote. “In fact, if this kind of upside surprise is repeated next month, we could be facing a fifth consecutive 0.75% hike in December with policy rates blowing through the Fed’s peak rate forecast before this year is over.”
Given the latest CPI report, “any continued pick-up in energy prices can get us to a new high” in headline inflation, said Steve Chiavarone, senior portfolio manager at Federated Hermes. That “could very well spook markets as it pushes back any expectation of peak inflation, peak Fed hawkishness and could force the market to contemplate a terminal fed funds rate above 5%. All that would raise the risks of more bond pain, more equity pain, and a greater risk of financial accident.”

Meanwhile, UK markets remained in turmoil almost two weeks after the government unveiled a plan to drastically cut taxes. The pound surged back above $1.13, buoyed by reports that government officials are working on a U-turn of tax cuts. Gilts also rallied, with the yield on 30-year debt dropping as much as 46 basis points.

The yen sank to its lowest level in more than 30 years after the US inflation report, before reversing the move in a whiplash trade that raised market chatter of potential intervention

Elsewhere, oil gained for the first time this week, with crude in New York rising back above $89 a barrel after a US crude report flagged potential bullish drivers, shrugging off inflation data. The International Energy Agency earlier warned production cuts agreed by OPEC+ risked causing oil prices to spike and tipping the global economy into recession.

Key events this week:

Earnings on Friday: JPMorgan Chase & Co., Citigroup Inc., Morgan Stanley, UnitedHealth Group Inc., U.S. Bancorp, Wells Fargo & Co.
G-20 finance ministers and central bankers meet, Thursday
China CPI, PPI, trade, Friday
US retail sales, business inventories, University of Michigan consumer sentiment, Friday
BOE emergency bond buying is set to end, Friday

Some of the main moves in markets:

Stocks

The S&P 500 rose 2.6% as of 4 p.m. New York time
The Nasdaq 100 rose 2.3%
The Dow Jones Industrial Average rose 2.8%
The MSCI World index rose 1.7%

Currencies

The Bloomberg Dollar Spot Index fell 0.4%
The euro rose 0.8% to $0.9776
The British pound rose 2% to $1.1317
The Japanese yen fell 0.2% to 147.26 per dollar

Cryptocurrencies

Bitcoin rose 1% to $19,369.94
Ether fell 0.9% to $1,287.49

Bonds

The yield on 10-year Treasuries advanced six basis points to 3.96%
Germany’s 10-year yield declined three basis points to 2.29%
Britain’s 10-year yield declined 24 basis points to 4.20%

Commodities

West Texas Intermediate crude rose 2.2% to $89.15 a barrel
Gold futures fell 0.4% to $1,671 an ounce