Wall St: Stocks climb in sharp reversal; Dow, S&P jump 2%

Stocks are swinging sharply higher on Wall Street Thursday after erasing steep earlier losses caused by a worse-than-expected report on inflation, the latest set of corkscrew moves to rock financial markets.

Treasury yields pulled back from highs as investors assessed the impact of the latest hot inflation reading on the US Federal Reserve’s policy path.

The S&P 500 jumped 2%, reversing losses of more than 2% at the open in a comeback from session lows with gains broadening to all 11 major sectors. 

The tech-heavy Nasdaq 100 and Dow Jones Industrial Average rose more than 2%. The yield on policy-sensitive two-year notes spiked above 4.5% before dropping back.

Besides stocks, prices also initially tumbled for bonds and cryptocurrencies immediately after the US Labor Department released its report showing inflation is spreading more widely across the economy. 

One component that's closely followed by policy makers and investors accelerated to its hottest level in 40 years.

Bitcoin becoming less volatile

At first blush, Bitcoin becoming less volatile than stocks might appear like a positive development. But crypto traders are warning that in a low-volume environment, that might not be a great thing.

Bitcoin fell about 2.6% to $18,666 as of 6:55 am in New York on Thursday, the lowest level in about two weeks.

Crypto has suffered this year as the Federal Reserve and other central banks aggressively raise rates to cool inflation.

That’s pushed a lot of digital-asset investors -- especially those who had gotten in just over the last few years -- away from the space and from daily trading, a big change from the hype-fueled mania of years past.

Retail investors, in particular, have been missing in action. Meanwhile, institutions have become the main players recently, potentially helping to explain why volatility has declined.

Fed to deliver a large rate hike in Nov

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 have plunged more than 25% this year as the central bank began tightening policy to curb inflation, leaving investors to weigh how much damage is left for share prices.

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.

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.

“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.”

Market bets on rates now lean toward back-to-back 75 basis-point hikes at the next two Fed meetings. They now expect the central bank to push rates past 4.85% before the tightening cyle ends. The current rate is 3.25%.

More market commentary

• “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.

Speculation leaders may reconsider the controversial program sent the pound higher and yields on benchmark gilts tumbling more than 25 basis points.