Dow ends over 800 points higher as stocks stage massive turnaround after hot inflation reading

What drove markets

Stocks indexes finished sharply higher, the dollar gave back gains versus most major currencies and Treasury yields pulled back from highs after moving sharply in the other direction in the wake of a higher-than-expected reading of the September consumer-price index.

One of the most closely watched economic data releases of the month, the year-over-year headline number for the September consumer-price index came in at 8.2%, down from 8.3%, but it was the rise in the core CPI number, which strips out volatile food and energy prices, that got the blame for the selloff, posting a monthly rise of 0.6% versus a Wall Street forecast of 0.4%.

See: Consumer prices jump again in September and CPI shows little letup in high inflation

Crucial data points, including CPI and nonfarm payrolls, have tended to see sharp, knee-jerk reactions, noted Art Hogan, chief market strategist at B. Riley Wealth Management.

The reaction among traders was to see the data as “another step closer to Armageddon, and then take a step back from the cliff and say we’ve already priced a lot of that in,” Hogan said, in a phone interview.

“There was an additional panic in the markets but it demonstrates that they’re going to see a higher interest rate environment than perhaps some expected,” said Chris Campbell, chief policy strategist at Kroll, via phone.

“What they (Federal Reserve) have done has not yet worked, so they brought out the big guns by raising interest rates, and more of the smaller guns by instituting quantitative tightening, but even those two together have not borne fruit,” said Campbell.

The September CPI report is the seventh out of nine CPI readings this year to have topped expectations, according to Michael Brown, senior market analyst at Caxton. Hot CPI readings have been responsible for some of the biggest down days for the S&P 500 so far in 2022.

Rex Nutting: The best measure shows inflation has now fallen to the Fed’s target

Fawad Razaqzada, market analyst at City Index and Forex.com, doubts the bounce will prove durable.

“Indeed, following the stronger CPI report, the case has been sealed for a fourth 75-basis point hike in September, although there are now talks that the Fed could even hike by 100 bps. This should keep the US dollar supported on the dips against currencies where the central bank is either hiking less aggressively or is not. Stocks and gold might continue to struggle until something changes fundamentally,” he said.

Hogan, however, argued that with the much anticipated CPI reading in the rearview mirror, investors were likely to focus on corporate results as third quarter earnings reporting season gets under way next week. Expectations have been lowered sharply amid the macroeconomic gloom, offering room for stocks to bounce if results and guidance surpass expectations, he said, noting that a similar setup accompanied the market’s bounce off its lows in June.

See: Hot U.S. inflation is boosting market expectations for a 5% or higher fed-funds rate in a matter of months

Meanwhile, traders of Fed funds futures were pricing in 96.6% odds of a 75 basis point hike at the Fed’s November meeting, up from 83% earlier Thursday before the data were released.

In addition to expectations for another jumbo interest rate hike in September, investors were also cementing strong odds of another 75 basis-point rate hike in December, with odds in the Fed funds futures market rising to more than 65%. Assuming the Fed follows through with both, they would be the fourth and fifth 75 basis-point rate hikes of the year, respectively.

“Not only is the Federal Reserve going to raise rates by 75 bps 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 Independent Advisor Alliance, in emailed comments.

Investors also received a report on weekly jobless claims, which showed that the number of Americans filing for unemployment benefits has now increased during three of the last four weeks, although some of the rise was attributed to the impact of Hurricane Ian in Florida.

Companies in focus

• Taiwan Semiconductor Manufacturing Co.
  TSM,
  +3.92%
  shares rallied 3.9% after the company reported its net income nearly doubled from a year ago and revenue doubled more than 50%.

• Shares of Walgreens Boots Alliance Inc.
  WBA,
  +5.35%
  rose 5.4% after the drug store and healthcare services company reported fiscal fourth-quarter profit and sales that fell but topped expectations, and raised its long-term target for its U.S. Healthcare business.

• Shares of Albertsons Cos. Inc.
  ACI,
  +11.53%
  rose more than 11.5% after Bloomberg News reported that Kroger Co.
  KR,
  +1.15%
  was in merger talks with the smaller grocer. Kroger
  KR,
  +1.15%
  shares rose 1.2%.

• Pfizer Inc.
  PFE,
  +2.26%
  and German partner BioNTech SE
  BNTX,
  +2.46%
  said Thursday that early data from a Phase 2/3 clinical trial of their omicron BA.4/BA.5-adapted bivalent booster showed positive results in treating individuals aged 18 and older. Pfizer shares rose 2.3%, while BioNTech’s American depositary receipts were up 2.5%.

• Netflix Inc.
  NFLX,
  +5.27%
  shares finished 5.3% higher after the company said it will charge $6.99 for its its ad-supported subscriptions.

— Joseph Adinolfi contributed to this article