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Bloodbath is arguably the best term to describe yesterday’s trading activity in equities. Dow Jones fell nearly 4% to record the worst day since June 2022, while NASDAQ slipped 5.16%. The S&P 500 closed the day 4.32% lower in response to the hotter-than-expected August CPI report.
Yesterday, a Nomura analyst said that materializing inflation risks suggest a 100bp rate hike by the Fed in September and a higher terminal rate.
Similarly, some other Street strategists see the bear market continuing to unravel as the Fed pivot is now very likely off the table.
“We now expect a terminal rate of 4.50-4.75% by February 2023, 50bp higher than our previous forecast,” the analyst told investors.
“Powell’s speech at Jackson Hole and the most recent CPI print likely indicate that a Fed pivot is off the table anytime soon, making markets more vulnerable to rate hikes and growth concerns. In addition, return correlations of major global markets with U.S. markets have been increasing (particularly U.S. correlation with Asia), which typically coincide with major market drawdowns,” Berenberg strategists wrote in a client note.
Markets are now pricing in the potential for a 100 bp rate hike at this month’s FOMC meeting. Although the consensus still remains on a 75 bp rate hike, the 1.00% move is now on the table as well.
A Citi U.S. economist’s base-case scenario is a 75bp hike, but he notes that 100bp is “a possible outcome.”
Bank of America’s U.S. economist also looks for a 75bp rate hike this month. He also forecasts that the updated projections will point toward rising risks of a hard landing.
“We think the median member will want the funds rate above 4.0% by early next year. Updated Fed forecasts are likely to show a higher terminal rate, less growth, and higher unemployment,” the economist told clients.
