Dow falls 100 points after higher-than-expected August inflation report

The consumer-price index, which measures costs across a broad variety of goods and services, rose 0.6% for the month, its biggest monthly jump in 14 months, the Bureau of Labor Statistics reported. Excluding volatile energy and food prices, the so-called core inflation rose by 0.3%, also a bigger rise than the 0.2% advance that had been expected.

See: CPI shows biggest increase in inflation in 14 months

Vishal Khanduja, co-head of broad markets fixed income at Morgan Stanley Investment Management, said the headline reading was not a big focus since much of its monthly rise can be explained by the rising oil prices
CL00,
-0.09%

CL.1,
-0.09%.

However, the so-called super-core inflation which refers to the rate of inflation in the services sector after stripping out energy and housing costs, as well as the still-sticky core inflation, did not slow as expected in August, but also didn’t show “much acceleration that would nervously worry the market,” Khanduja told MarketWatch in a phone interview.

“There are push and pull factors within the subcomponents of CPI and that is why we’re getting a very muted reaction from the market, but there is enough in the CPI number that we can convincingly say that September is off the table,”as far as a Fed rate hike is concerned, he said.

See: See how much inflation has raised your cost of living, using MarketWatch’s guide

Still, Nigel Green of deVere Group, a financial-advice and asset-management firm said the uptick in inflation gives the central bank extra reason to be hawkish moving forward. “We also expect the Fed will start to prepare the market for a rate increase at its November meeting,” Green said in emailed comments on Wednesday.

Fed funds futures traders continued to see a 97% probability of no interest-rate hikes by the Federal Reserve at its policy meeting next week, while the chance of a 25-basis-point hike at its November meeting was seen at 39%, little changed from a day ago, according to the CME Fed Watch Tool. 

The yield on the 10-year Treasury note
BX:TMUBMUSD10Y
dropped 3.5 basis points to 4.251%, while the policy-sensitive 2-year Treasury
BX:TMUBMUSD02Y
note was off 4.2 basis points to 4.999%.

Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, said Wednesday’s report was a disappointment due to the 0.3% monthly jump in the core inflation rate. “This isn’t the goldilocks number that investors were hoping for, but markets can still trade in a range — as inflation is high enough to keep the Fed still in play, but not hot enough for a shift away from the ‘Fed is almost done’ narrative,” he said in emailed comments.

Zaccarelli also said the stock market can still rally into year-end as long as the economy remains resilient and inflation doesn’t “reignite,” once the stock market gets past the seasonally weak months of September and October.

MarketWatch Live Coverage: Stock Market Today: Dow nudges higher after CPI reading

See: Tech’s wild week: How Apple, Google, AI, Arm’s mega IPO could set the agenda for years

Meanwhile, the U.S. recorded a $89 billion budget surplus in August, compared with a deficit of $220 billion in the same month last year, the Treasury Department said Tuesday. The improvement was due to technical government accounting.

Companies in focus

• Citigroup Inc.’s
  C,
  +1.66%
  stock was up 1.7% Wednesday after the megabank said it would reorganize into a flatter structure, with the heads of its five major business units reporting directly to Chief Executive Jane Fraser.

• Shares of Nio
  NIO,
  -4.64%
  and Li Auto
  LI,
  -0.54%
  declined by 4.5% and 0.1%, respectively, on Wednesday after the European Union said it’s probing Chinese government subsidies to electric vehicle makers.

• Apple’s shares
  AAPL,
  -1.19%
  slipped 0.8%. A Chinese government spokesperson denied there’s a ban in place on foreign phones but noted “security incidents” with the iPhone.

• Spirit Airlines Inc.’s stock 
  SAVE,
  -6.31%
  tumbled 5.4% on Wednesday after the discount carrier lowered its third-quarter guidance to reflect increased promotional activity for travel in the second half and a recent spike in fuel prices. American Airlines Group
  AAL,
  -5.67%
  also cut its profit outlook in the third quarter, citing more expensive fuel and costs associated with a new labor agreement.

• Moderna Inc.
  MRNA,
  +3.18%
  gained 3% after the Centers for Disease Control and Prevention recommended updated Covid-19 vaccines to all Americans ages six months and older. Shares of Pfizer Inc.
  PFE,
  -0.23%
  dipped 0.4%.