A Rate Hike Is Basically Locked In, and Stock Market Indexes Rose Anyway
Key Points
The Nasdaq Composite rose 1.3%, the S&P 500 1.1%, and the Dow 1.0% by late Friday morning.
Consumer prices rose 0.4% in August and 3.4% from a year ago, with core inflation a tenth hotter than expected.
Brent crude fell 2.7% but is still on pace for a weekly gain near 8%.
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Friday marked 25 years since the Sept. 11 attacks, which closed U.S. markets for four days and remain the longest shutdown since the outbreak of World War I in 1914.
Inflation came in firm on Friday morning, rate-hike odds shot past 85%, and stocks went up. That sounds backward until you check the oil trade.
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The Nasdaq Composite (NASDAQINDEX: ^IXIC) rose 1.3% as of 11:42 a.m. ET, the S&P 500 (SNPINDEX: ^GSPC) added 1.1%, and the Dow Jones Industrial Average (DJINDICES: ^DJI) climbed 1%. Twenty-seven of the Dow's 30 components traded higher. That's a pretty solid uptick despite a bitter dose of economic data.
^DJI data by YCharts
Falling oil prices outweighed a heavy inflation report
The Bureau of Labor Statistics issued a tough report on August's consumer prices. The CPI index rose 0.4% last month and 3.4% over the last year, right in line with economists' estimates. The core reading, which strips out food and energy, came in at 0.3% for the month, slightly above expectations. Gasoline alone accounted for more than a third of the headline increase, which tells you where the pricing pressure is coming from.
With these figures settled, traders are almost certain that the Fed will raise federal funds rates next week. CME Group's FedWatch tool put the odds of a quarter-point hike at the Sept. 15-16 meeting at 86.7%, up from 72.4% yesterday and 59.4% a week ago.
Fed chairman Kevin Warsh. Image source: White House Photographer Daniel Torok.
Stocks rose anyway, because oil finally reversed course. Brent Crude slid 2.7% to $104.68, though it's still on pace for a weekly increase of roughly 8%. The United States Oil Fund (NYSEMKT: USO) dropped 3.2%, the only significant decliner among the many exchange-traded funds I use for tracking daily market trends.
Almost everything else went up, as it tends to do when energy is getting cheaper. Caterpillar (NYSE: CAT) rose 2.1% and added 99 Dow points by itself. Apple (NASDAQ: AAPL) climbed 2.5% and Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) gained 2.7%, which between them explained about half the Nasdaq Composite's move. The tech titans didn't have much news of their own today, so their gains are another reaction to the inflation and energy data.
Consumers are bracing, even if the market isn't
The Fed meets Tuesday and Wednesday next week. By now, a quarter-point hike seems like a formality, but there's still a voting process and chairman Kevin Warsh must make the announcement. Expectations don't count.
The more interesting question, as Principal Asset Management strategist Seema Shah put it on Friday, is whether one hike is enough after years of inflation running above target. Her answer is no. The market indexes seem to disagree, judging by today's gains.
A second data point deserves attention. The University of Michigan's consumer sentiment index fell 7.5% in September to 47.8, the second-lowest reading in the survey's history dating back to 1952. People expect inflation to continue rising, and the constrained oil shipping system isn't helping.
Friday was a good day. The week was not, and the Fed vote is coming on Wednesday. Stay tuned.
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Anders Bylund has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet, Apple, and Caterpillar. The Motley Fool has a disclosure policy.
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