Closing Stock Market SummaryThe stock market logged steep losses today on the heels of disappointing August inflation data that served as a reality check for a market that bought into the peak inflation narrative. The major averages took a sharp turn lower at the open and then moved sideways before geopolitical worries sent the market distinctly lower ahead of the close. Broad selling brought the S&P 500 and Nasdaq Composite below their respective 50-day moving averages, and the S&P 500 fell toward the 3,900 level by the close.
The initial sell-off was precipitated by hotter-than-expected August inflation data, which challenged the peak inflation narrative. This fueled worries about the Fed's rate hike path. To that end, the fed funds futures market is now pricing in a 32% probability of a 100 basis point rate hike at the September 20-21 FOMC meeting versus 0.0% yesterday, according to the CME FedWatch Tool. Effectively, then, the market is assigning a 100% probability to a rate hike of at least 75 basis points next week.
Geopolitical factors further weighed on investor mentality following a Reuters report that the U.S. is looking at possible sanctions on China that would deter a possible invasion of Taiwan. This came after an earlier Reuters report today that said President Putin and President Xi will be meeting in Uzbekistan on Thursday and that they will discuss various matters, including Ukraine and Taiwan.
Bids fell by the wayside following this afternoon news item and the major indices cascaded lower into the close, settling near their worst levels of the session.
Separately, a fund manager survey by BofA revealed the highest cash level (6.1%) since 2001 and a record-low share of fund managers taking higher risk than normal. That extreme bearish-minded positioning is considered to be a contrarian indicator, but the stock market's performance was ultimately dictated by the disappointing CPI report and geopolitical worries.
Treasury yields rose sharply in response to the CPI data. The 2-yr note yield, which was at 3.50% before the release, settled at 3.76%. The 10-yr note yield, which was at 3.30% before the release, settled at 3.42%.
The US Dollar Index also moved noticeably higher following the CPI report. It was up 1.4% to 109.86.
Selling efforts were broad and orderly in nature in what amounted to a general buyers' strike. All 11 S&P 500 sectors closed in the red with losses ranging from 2.5% (energy) to 5.6% (communication services). All 30 Dow components finished with a loss.
There was little discrimination as many stocks logged sizable losses. The Vanguard Mega Cap Growth ETF (MGK) closed with a 5.4% loss and the Invesco S&P 500 Equal Weight ETF (RSP) closed with a 4.0% loss. The Russell 3000 Growth Index closed down 4.6% and the Russell 3000 Value Index closed down 3.6%.
Decliners outpaced advancers by an 8-to-1 margin at the NYSE and a 10-to-3 margin at the Nasdaq.
Energy complex futures settled mixed with WTI crude oil futures falling 0.4% to $87.49/bbl while natural gas futures rose 0.2% to $8.33/mmbtu.
Looking ahead to Wednesday, market participants will receive the weekly MBA Mortgage Application Index (prior -0.8%) at 7:00 a.m. ET, August PPI (consensus -0.1%; prior -0.5%) and core PPI ( consensus 0.3%; prior 0.2%) at 8:30 a.m. ET, and weekly EIA Crude Oil Inventories (prior +8.84 million) at 10:30 a.m. ET.
Reviewing today's economic data:
- NFIB Small Business Optimism reading was 91.8 compared to the prior 89.9 reading
- Total CPI increased 0.1% month-over-month in August (consensus -0.1%) and core CPI, which excludes food and energy, rose 0.6% month-over-month (consensus 0.3%). That left the year-over-year increases at 8.3% for total CPI (versus 8.5% in July) and 6.3% for core CPI (versus 5.9% in July).
- The key takeaway from the report is the acceleration in the year-over-year rate for core CPI, which was pushed in part by increases in the indexes for shelter, medical care, and new vehicles. That has provided a disheartening data point for market participants -- and the Fed -- that suggests the rate hike at the September 20-21 FOMC meeting will be 75 basis points and that one cannot be assured that there won't be another aggressive rate hike after that.
- The Treasury Budget for August showed a deficit of $219.6 bln versus a deficit of $170.6 bln a year ago. The Treasury Budget data is not seasonally adjusted, so the August deficit cannot be compared to the deficit of $211.1 bln for July.
Dow Jones Industrial Average: -14.4% YTD
S&P 400: -14.5% YTD
S&P 500: -17.5% YTD
Russell 2000: -18.4% YTD
Nasdaq Composite: -25.6% YTD