Stock market plunges by nearly 700 points in response to inflation report, diminishing prospects of a significant interest rate reduction
Following the release of the August CPI report, which indicated a yearly increase in prices slowing down to 2.5%, the lowest figure since February 2021, the Dow witnessed a substantial drop of up to 700 points, equating to 1.7%. Similarly, the S&P 500 dipped by 1.5% and the Nasdaq Composite saw a decrease of 1%.
Post-report, CNN's 'Fear and Greed Index', which gauges seven sentiment indicators of the market, shifted further into 'fear' terrain.
In a monthly analysis, prices remained steady at a 0.2% increase, identical to July's figure.
However, what seemed to evoke significant interest was the 0.3% monthly upsurge in the core CPI indicator, which excludes food and energy costs. This surpassed the predicted 0.2% rise. Central bank officials maintain a keen focus on these core inflation readings as they provide a clearer picture of long-term price trends.
The unexpectedly high jump in core inflation may lead central bank officials to adopt a more cautious approach when considering whether to reduce interest rates and by how much.
On Tuesday, traders were estimating a 34% probability of a 0.5% rate cut. However, after the CPI figures were revealed on Wednesday morning, the odds of such a reduction shrank to 15%. Now, traders are predicting an 85% likelihood of a 0.25% cut this month, as well as a higher chance of a 0.25% cut in November's meeting.
This situation is still unfolding and will be updated.
In light of the unexpectedly high core inflation rate, some investors may reconsider their business strategies, potentially shifting towards more conservative investing approaches. The unexpected jump in core inflation could also influence the business decisions of companies that rely heavily on price sensitivity.
