S&P 500 and Nasdaq 100 Sync as High Inflation Bolster Case for Hawkish Fed

US Stock Outlook:

• S&P 500 and Nasdaq 100 U. fell into freefall as,s, treasure yield soar high
• Higher-than-expected US inflation has raised fears that the Federal Reserve will have no choice but to raise interest rates Forcefully in the medium term
• chances of flamboyant Monetary policy likely to curb stocks Staging a Meaningful and Sustainable Recovery

most Read: US inflation at 8.3% in August, Fed likely to maintain hawkish bias

US stocks fell on Tuesday, a . decline of US Treasury yield rises spark worse than expected US inflation data, The fall on Wall Street was broad-based, but consumer discretionary and information technology sectors bore the brunt of the sell-off in a session characterized by heightened risk aversion and volatility in most assets.

When it’s all said and done, the S&P 500 fell 4.32% to 3,933, hitting its lowest level since last Wednesday and its biggest drop since June 2020. Meanwhile, the Nasdaq 100 fell 5.54% to 12,034, its worst day since March 2020. , with heavy hits Apple, Microsoft and Amazon, falling 5.84%, 5.48% and 7.03% respectively at the closing bell.

The catalyst that triggered the brutal recession was August consumer price index report, released this morning by the US Bureau of Labor Statistics. According to the agency, the headline CPI rose by 0.1% mom and 8.3% annually, two-tenths of a percent above consensus forecasts. Core gauges also surprised by a similar margin of 0.6% mommy and 6.3% year-on-year up.

related: Consumer Price Index and Forex – How CPI Data Affect Currency Prices

Today’s CPI results suggest that price pressures are not weakening at the desired pace, a sign that the Federal Reserve will have no choice but to continue. Forcefully increase borrowing costs in the coming months To rebalance demand with supply in the economy. An aggressive monetary policy outlook could further exacerbate the current slowdown. increased risk of a hard landing,

On the fixed income side, rates rose on the day, with the 2-year yield rising more than 20 basis points to 3.77%, its highest level since October 2007. Although the benchmark 10-year yield also rose, its advance was measured higher. Deepening the inverse of the 2s10s curveOne bad sign for the economy, Meanwhile, implied yields on Fed futures were also higher for most of the period, with traders now discounting the terminal rate of 4.32% in April 2023, up 36 basis points from morning lows.

2023 Fed Futures Contract Chart (Implicit Yield)

Source: trading view

Financial conditions are likely to tighten significantly in the coming days and weeks on expectations of more aggressive interest rate hikes Less chance of policy pivot in 2023, In this environment, stocks will struggle to make a meaningful and sustainable recovery, particularly in the areas of technology and growth (See a possible explanation here) means that the S&P 500 and Nasdaq 100 could see a downside correction in the near term.

S&P 500 Technical Outlook

The S&P 500 dropped on Tuesday, its biggest gain since last Wednesday. Following this sharp decline, the index is approaching key support near the 3,900 area, where the September lows converged with a short-term rising trend line extending from the 2022 lows. If the sellers manage to break this crucial floor in the coming days, the sentiment could clearly turn worse, consolidating the negative market dynamics and paving the way for a slide towards 3,815.

On the other hand, if the dip-buyers emerge unexpectedly again and turns upside down, initial resistance lies at 4,055. On further strength, the focus shifts to 4,120, followed by 4,175.

S&P 500 Technical Chart

S&P 500 chart created using TradingView

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— Written by Diego Coleman, Market Strategist at DailyFX