Here's where stocks and inflation could be headed next after the market's stunning reversal
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Jason Ma
Oct 14, 2022, 16:49 IST
Nicolas Economou/NurPhoto via Getty Images
Good morning, this is Jason Ma and I'm still in shock from Thursday's massive stock market swings after the inflation report, which showed consumer prices rose 8.2% annually in September, ahead of expectations for an 8.1% increase. While the headline rate dipped from 8.3% in August, core inflation accelerated to 6.6% from 6.3%, cementing expectations for more jumbo-sized rate hikes from the Federal Reserve.
The stubborn level of inflation is seen keeping the Fed aggressive into next year as well. Analysts at Barclays raised their forecasts on Fed rate hikes in December and February to 75 and 50 basis points, respectively. That would propel the fed funds rate to a range of 5% to 5.25%, up from Barclays' earlier forecast for a range of 4.5% to 4.75%.
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Any relief rally that takes hold in the stock market could send the S&P 500 to its first big resistance test around 3,914, Stockton added. That would represent more than 6% additional upside from current levels. Still, even if such a move occurs, she sees deterioration in long-term momentum indicators and would use rallies as an opportunity to sell.
And regardless of whether October does end up being a bear market killer, the risks of a longer period of inflation and a global recession are rising, meaning US stocks could plunge by the middle of next year, according to S&P Global.
The research firm estimated that the Fed could raise the fed funds rate to at least 5%-5.25% by then, and will likely stay "higher for longer" compared to current expectations – which could lead stocks to plummet as much as 14.5% by mid-2023, analysts warned.
Over a longer time horizon, the outlook doesn't get much better. High inflation reports could become the norm after more than a decade of sub-2% inflation readings, according to Bank of America. That's because underinvestment in energy production, sticky wage inflation, and aging demographics are set to drive structural inflation for years to come.
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"Historically, it takes an average of 10 years for a developed economy to return to 2% inflation [once] the 5% threshold is breached," BofA said. And the Fed's aggressive interest rate hikes are likely to have little impact on inflation as much of the issues are on the supply side rather than the demand side.
What do you think? Are we in a new era of persistent high inflation? Email jma@insider.com.
In other news:
2. US stock futures fall early Friday, as investors await third-quarter earnings from big Wall Street banks. Meanwhile, Treasury Secretary Janet Yellen says the war in Ukraine will wreck Russia's economy for years. Here are the latest market moves.
3. Earnings on deck: JPMorgan Chase, Morgan Stanley, Citigroup and others are all reporting.
7. Russia President Vladimir Putin offered to redirect natural-gas supplies to Europe via Turkey, which would become "the largest gas hub for Europe." That's because the Nord Stream natural-gas pipelines linking Russia to Europe are damaged from suspected acts sabotage. But Turkey's energy minister said it was the first time he was hearing about the idea.
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Curated by Jason Ma in Los Angeles. Feedback or tips? Email jma@insider.com.
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