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Markets Race into the Green at the Close

·3 min read

Racing off session lows in the last half hour of today’s trading session, three of the four major indices met the closing bell in positive territory. Following the worst single day of trading since the summer of 2020, the Dow eked out a 30-point gain, +0.10%. The S&P 500 grew a bit taller, +0.34%, while the Nasdaq outperformed the field of the day, +0.74%. Only the small-cap Russell 2000 couldn’t cross into the green by the close, -0.08%.

Markets spent most of the session in positive territory, however, filling in some potholes left by yesterday’s carnage, which came about when stubborn high inflation prints from the Consumer Price Index (CPI) for August made it clear the Fed was far from done raising interest rates — and causing “pain” — in the economy. What’s still most likely true after that decimation in the markets is that the Fed is still going to raise interest rates 75 basis points (bps) next week, the same as before that decimation.

That’s because the reason for the selloff this time around is a completely independent narrative than what we saw in June 2020: back then, markets were swallowing the nasty pill that the Covid pandemic had no clear end in sight; yesterday’s selloff basically just bulldozed back a week’s worth of bullish sentiment that the Fed was going to perhaps hike rates less aggressively and finish sooner than the voting Fed members had indicated. We now know that was just wishful thinking, and it would be wise for us to take this lesson forward with us.

This morning’s Producer Priced Index (PPI) numbers for August — the sister monthly report to CPI — were much more in-line with expectations, after CPI catching most everyone off-guard. PPI represents the wholesale inflation metrics that largely funnel into future CPI, so coming down month over month — and notably off severe highs in March of this year — might give some indication CPI will start coming down next month.

But this will, of course, be after the next Fed meeting, which will bring the Fed funds rate to an even 3.00% (from 0.00% in March) with two more Federal Open Market Committee meetings before year’s end. Analysts are now considering which side of 4% the Fed funds rate will be by the December meeting, and whether the Fed will need to keep hiking rates from there. Considering it’s been less than a week before 3.5-3.75% was consensus by the end of 2022, this level of interest rate is not something many (equity) investors wish to contemplate.

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