Huge 1500-Point Swing on the Dow After Disappointing CPI

Wow! We thought we had an interesting week of trading before today — we hadn’t seen anything yet. A jaw-dropping swing of more than 1500 points on the Dow today illustrates the topsy-turvy environment we’ve experienced, and without any major catalyst for reversing the downward trajectory.

Well, there is one: 52-week lows were hit like a third rail, and markets recoiled the other direction. The S&P 500 briefly touched below 3500 and hurtled north for the rest of the session, with the other major indices along for the ride. By the closing bell, we saw the Dow +827 points, +2.83%, while the S&P was +2.60%. The Nasdaq underperformed the field but still grew +2.23%, and the small-cap Russell 2000 reached +2.41%. Financials and Energy led the way, a day ahead of major banks reporting Q3 earnings tomorrow morning.

To be clear, this morning’s Consumer Price Index (CPI) report was bad news pretty much all the way around — at least in terms of whether the Fed will see fit to ease up on interest rate hikes. Aside from an 8-handle year over year yet again (+8.2%, up from +8.1% expected), September showed +0.8% price increases in food and medical costs. These numbers are more entrenched in the economy than food and energy prices — which, for September’s “core” read, reached new 40-year highs to +6.6% year over year.

So what explains the Dow’s single-best trading day since November 2020? Certainly nothing regarding inflation data. It would also be hard to make an argument that the pivot in the U.K. from a contrarian tax cut while global interest rates grow to something seemingly more rational could have made up this vast difference today; this news out of Britain came out before the CPI numbers were released. And while they do depict the fast action of a world looking to mend where the Fed is “breaking things,” they do not fully explain the sort of major snap-back we saw in the markets today.

Until further evidence is submitted, it would appear hitting multi-year lows is a bridge too far at this time for market participants. The calculus may be that pricing-in another 75 basis-point rate hike at the top of next month doesn’t require such a deep sell-off — indeed, it may appear as if much of this move is already priced in. While we were all disappointed not see a big inflation iceberg drop into the sea with CPI data this morning, such as a 7-handle year over year which would have shown a 200 bps drop since June, we seem to be standing on terra firma, relatively speaking.

Tomorrow morning, we get Q3 earnings report from an outsized market capitalization of Wall Street banks: JPMorgan Chase JPM, Citigroup C, Wells Fargo WFC, Morgan Stanley MS and U.S. Bancorp USB, among others. JPMorgan, which is expected to report -20% earnings growth on +9% revenues year over year, rose +5.5% today. This is along the lines of what can be expected from the others, although Wells and U.S. Bank are expected to report lower quarterly revenues, as well.

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