Markets fall on scorching financial system, probability of 0.5% price hike

James Bullard, President of the Federal Reserve Bank of St. Louis, at the Jackson Hole Economic Symposium in Moran, Wyoming, U.S., on Thursday, August 22, 2019.

David Paul Morris | Bloomberg | Getty Images

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US stocks are cowed by a persistently hot economy – and by the Fed with aggressive rhetoric.

What you need to know today

  • The US Producer Price Index, which measures inflation at the wholesale level, rose 0.7% in January. It was the sharpest rise since June and 0.3 percentage points higher than economists had expected.
  • Tesla is recalling 362,758 vehicles equipped with its experimental driver assistance software. The company warned that the software, known as the Full Self-Driving Beta, could cause vehicles to crash.
  • PROFESSIONAL According to Bernstein analyst Gautam Chhugani, crypto will make a comeback in 2023. Investors may see recent US regulatory action as less stringent than they anticipated.

The final result

Looking at the January figures, the US economy is running out of steam. A quick summary: The lowest unemployment rate in 53 years. A rebound in consumer spending despite higher prices. And overnight we found out that the producer price index had risen the most in eight months. This almost bizarrely strong economy implies that inflation – while still declining – remains uncomfortably high and sticky.

For a while, it seemed markets could live with this – and even embrace it as a new normal, where economic growth can easily sustain with inflation above 2%. With each hotter than expected inflation report, markets rose.

Until yesterday. The markets eventually collapsed. The Dow Jones Industrial Average fell 1.26%, the S&P 500 lost 1.38% and the Nasdaq Composite lost 1.78%. “It should come as no surprise that the market is taking a breather as hopes of a dovish Fed fading in the coming months,” said Mike Loewengart, head of model portfolio construction at Morgan Stanley.

In fact, it’s not just that the Federal Reserve’s doves might be fluttering away. The hawks swoop in. Markets had been widely expecting and pricing in rate hikes of 25 basis points for the next two Fed meetings. Yesterday, that forecast was severely shaken.

St. Louis President James Bullard said Thursday that he was “a proponent of a 50 basis point hike and … argued that we should get to what the committee considered sufficiently restrictive as soon as possible in interest rates.” “. Cleveland Fed President Loretta Mester echoed Bullard’s radical stance, saying she wants higher rate hikes. Neither Mester nor Bullard are voting on the Federal Open Market Committee this year, but their opinions could signal that the Fed is increasingly determined to stifle inflation.

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Correction: This report has been updated to accurately reflect the US trading day discussed. An earlier version used the wrong day of the week.

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