U.S. stock markets plunged into the red on Tuesday after new data showed inflation is proving stubbornly resilient and will require much higher interest rates to bring it under control.
The Dow Jones Industrial Average closed 1,276 points and the broader S&P 500 lost nearly 177 – down about 4% each – after new data showed the official inflation rate in the states US continues to be stubbornly high, up 8.3% on the year. until August.
Tuesday’s selloff was the worst day for the S&P 500 since the early days of the pandemic in March 2020. The tech-focused Nasdaq fared even worse, down more than 600 points, or more than 5% .
The US central bank, the Federal Reserve, has already hiked its interest rate four times this year in an aggressive campaign to get ahead of inflation, but data from August suggests those measures have not been enough and that more will be needed.
Higher interest rates are generally seen as bad news for the stock market, as they increase the cost of borrowing and also tend to slow consumer spending, which dampens corporate profits.
“The Fed can’t let inflation persist. You have to do whatever it takes to keep prices from rising,” said Russell Evans, managing director of Avitas Wealth Management. “It indicates that the Fed still has a lot of work to do to bring inflation down.”
Inflation numbers were so much worse than expected that traders now see a one in five chance of a full percentage point rate hike by the Fed next week. That would be four times the usual move, and no one in the futures market was predicting such a rise a day earlier.
Barry Schwartz, chief investment officer of Baskin Wealth Management in Toronto, said investors should prepare for volatile days until there are clear signs inflation is heading lower.
“I think everyone should resign themselves to the fact that it’s going to be a tough time until there’s a clear indication that interest rates have peaked,” he told CBC. News.
Fall of the loonie and the TSX
The Toronto Stock Exchange fared relatively better than its New York counterparts, but Canada’s main stock index also fell as commodities like oil and gold were crushed by the gloom. The TSX closed with 358 points or 1.8%. The loonie lost more than a cent to dip below 76 cents US as investors fled to the perceived safety of the US dollar.
“A lot of market participants went into that number really thinking inflation was slowing down and now they have to unwind these big trades,” Schwartz said. “Could be choppy, choppy waters for the rest of September.”