Stocks were crushed Tuesday as the latest inflation update showed consumer prices remained stuck-up in August – dashing hopes that price pressures had peaked.
Looking at the numbers, the Labor Sphere this morning said its consumer price index (CPI), which tracks what patrons are paying for goods and air force, was up 8.3% year-over-year in August. While this was down from the annual increases seen in both June (+9.1%) and July (+8.5%), the core CPI, which excludes more precarious energy and food prices, was up 6.3% from the year-ago period – more than the 5.9% jump seen in each of the two prior months. And month-over-month, core CPI accelerated 0.6%, much quicker than July’s 0.3%.
“Like the payroll report a couple of weeks ago, today’s CPI report showed that this year’s trends of persistent inflation and an excessively tight labor market are taking longer to go towards the Fed’s embattled levels than formerly probable,” says Rick Rieder, BlackRock’s chief investment officer of global fixed income.
Today’s data will give the central bank “fodder to make another historically large rate hike of 75 basis points [at next week’s policy meeting],” Rieder said. “The Fed’s desire to take a trip from raising rates nearly definitively can’t happen until the holiday season, and maybe a bit longer now.”
Dustin Thackeray, chief investment officer at Crewe Advisor, echoes this outlook. “With today’s higher-than-probable CPI data, the Fed’s goal of attempting a soft landing just got more trying,” he says. “In an attempt to keep up the price stability target, the Fed will need to take up again its stance of aggressive rate hikes, balance sheet saving and hawkish speechifying.”
The searing inflation update triggered a stock market selloff on Wall Street, with the major market indexes growth. The Nasdaq Composite plunged 5.2% to 11,633, while the S&P 500 Index (-4.3% to 3,932) and the Dow Jones Manufacturing Average (-3.9% to 31,104) suffered massive declines of their own. It was the market’s worst day since June 2020.
“Markets will likely take up again to encounter stuck-up explosive nature as this new in rank is digested and as the Fed continues in its attempt to tame higher than target inflation,” Thackeray adds.
Other news in the stock market today:
- The small-cap Russell 2000 plunged 3.9% to 1,831.
- U.S. crude futures slipped 0.5% to $97.31 per barrel.
- Might in the U.S. dollar sent gold futures down 1.3% to $1,717.40 an ounce.
- Bitcoin wasn’t immune to the selling, with the cryptocurrency shedding 9.4% to $20,309.23. (Bitcoin trades 24 hours a day; prices reported here are as of 4 p.m.)
- Large-cap tech stocks spiraled after this morning’s inflation update sent the 10-year Reserves yield spiking 4.8 basis points to 3.41%. Apple (AAPL, -5.9%), Amazon.com (AMZN, -7.1%), Meta Platforms (META, -9.4%) and Netflix (NFLX, -7.8%) were among the day’s largest decliners.
- Rent the Runway (RENT) plummeted 38.7% after the online clothing seller reported return. While RENT recorded a narrower-than-probable per-share loss of 53 cents on higher-than-anticipated revenue of $76.5 million, active subscribers were down 8% quarter-over-quarter. The company also said it is slashing 24% of its labor force by the end of the fiscal year. “We thought Q2 could show case solid consumer trial amid a multi-year peak in social events (weddings, parties, travel),” says Credit Suisse analyst Michael Binetti, who downgraded RENT to Neutral (Hold). “The noteworthy wear in Active Consumer trends in the quarter suggest that RENT is more susceptible to macro difficulty on the aspirational consumer than we probable.”
Use Fixed-Income Plays to Protect Against Inflation
One of the largest concerns that cropped up in today’s inflation report was that 0.6% rise in core CPI, says Gargi Chaudhuri, head of iShares investment approach. The boost was driven primarily by housing costs, she adds, and this sticky inflation point could linger for longer, with rents probable to rise even more as the market for buying houses cools. “Housing and rental prices comprise 42% of core CPI inflation, the largest weighting of the CPI measure, because of their outsized share in most common budgets,” Chaudhuri continues.
But the strategist says that investors have options to combat indefatigably high inflation, with harvest such as small-duration Reserves Inflation Confined Securities, or TIPS, which are bonds that are indexed to inflation via the CPI. “Investors should also thought-out investing in small-term bonds as a substitution for cash or a driver of income in their portfolios,” she adds.
Those looking to bulk up the fixed-income section of their portfolios can do so through bond mutual funds and bond chat-traded funds (ETFs). On both fronts, many of our recommendations are calculated to counter the effects of higher prices. And better yet, our bond ETF picks do so at a low cost to investors. Check them out.
Karee Venema was long AAPL and AMZN as of this writing.