Dow staged a huge comeback but S&P and Nasdaq still down

MANHATTAN (CN) — While volatility has not changed on Wall Street, at least the string of losses has ended, with the Dow posting higher positions than last week.

For most of the week, markets petered along, posting meager wins and losses. On Thursday, it seemed that Wall Street was going to hit a new low, but then investors raged back, with the Dow Jones Industrial Average picking up 827 points after originally dropping by 500 points earlier in the day. The S&P 500 and Nasdaq both had similar jumps, picking up nearly 100 points and 213 points, respectively.

By Friday’s closing bell, the Dow pulled out a win, gaining 347 points for the week. The S&P lost 55 points, however, and the Nasdaq fell 331 points since last Friday’s end of trading.

Economic data all keep pointing toward a recession. On Friday, a report by the U.S. Bureau of Labor Statistics showed retail sales were flat in September after a 0.4% increase in August, mostly due to a drop-off in big-ticket sales.

Earlier in the week, the Producer Price Index showed a 0.4% month-over-month increase in September after two months of declines, but it showed that price pressures continue to be elevated on food.

The PPI report continues to dampen optimism about inflation, as has the Consumer Price Index, which on Thursday showed prices rose 8.2% year-over-year due to the 0.4% increase in consumer prices last month — double what experts had forecast. The core CPI gained 7.4%, which is a new 40-year high, driven primarily by prices at restaurants and in rent.

Food prices saw a notable increase, according to the Bureau of Labor Statistics, with the second consecutive month of 0.8% increase in prices and a 11.2% year-over-year increase. Shelter prices also saw the second consecutive month with 0.7% price increase. Conversely, gasoline prices saw a 4.9% drop in September, even though it is up 18.2% for the year. Fuel oil prices also dropped for the fourth consecutive month, even though they are up 58% since September 2021.

The data were another miss for analysts hoping inflation would turn a corner and stop increasing, and they certainly were a downer for investors dismayed by the prospect of another round of hawkish rate hikes by the Federal Reserve.

“The Fed is trying to get inflation under control, but you wouldn’t know that looking at [Thursday’s] CPI data,” Morning Consult chief economist John Leer said in a statement. “While energy prices are falling, services inflation in shelter and transportation is running hot, forcing consumers to make tough spending decisions through year-end.”

Not only is the sticky inflation disappointing from a growth standpoint, it also shoots down hopes the Federal Reserve may back off further aggressive rate hikes. The central bank is now on track to raise the federal funds rate to 4.25% to 4.5% by the end of the year.

“Not only is the Federal Reserve going to raise rates by 75 bps points next month, but there is now a possibility that they will raise rates by another 75 bps in December,” said Chris Zaccarelli, chief investment officer for the Independent Advisor Alliance. “It is very difficult for this market to build a sustainable rally on the back of very high inflation and the expectation that the Federal Reserve is going to be more hawkish than ever.”

Officials expect higher rates will not go away before 2023. “Many participants noted that, with inflation well above the committee’s 2% objective and showing little sign so far of abating, and with supply and demand imbalances in the economy continuing, they had raised their assessment of the path of the federal funds rate that would likely be needed to achieve the committee’s goals,” the minutes from the Federal Open Market Committee, released earlier in the week, state.

Leading Fed officials have tried to be clear that the central bank has no plans to back away from its hawkish stance any time soon. In a speech before the National Association for Business Economics earlier this week, Vice Chair Lael Brainard said strong wage growth, coupled with high rental and housing costs, have kept inflation high and that “monetary policy will be restrictive for some time.”

Brainard also noted monetary policy officials did not expect the impact of core goods prices on inflation, adding “the surprise in August inflation data was the large contribution of core goods inflation to overall inflation at a point in the post-pandemic recovery when many forecasts anticipated this contribution would continue moderating.”

Earlier in the week, the Federal Reserve Bank of New York’s released its survey of inflation expectations from September, showing consumers predict inflation will be 5.4% a year from now, down from 5.75% in August and the lowest reading since September 2021. However, five-year inflation expectations increased to 2.2%.

Follow @NickRummell

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