Markets post a remarkable reversal after a hotter U.S. inflation data

Investors experienced a remarkable trading session on Thursday given the incredible intraday reversal across the equities, commodities, and forex markets following an initial sell-off after the release of hotter-than-expected U.S. inflation data for September.

The well-awaited monthly inflation data have been very important for economists as they can see the bigger picture of the economy and predict future inflation trends, while at the same time, it is very crucial for Federal Reserve’s monetary policy trajectory as well as for their interest rate hiking path since the Consumer Price index measures how quickly the prices consumers pay for a broad range of goods and services are rising.

A hotter-than-expected CPI data:

U.S. Bureau of Labor Statistics announced on Thursday a bit hotter-than-expected U.S. inflation print in September, with the Consumer Price Index, a key inflation barometer, soaring by 8,2% y-y versus market expectation of an 8,1% annual increase.

The printing was slightly lower than the 8,3% rise in August, with monthly gains fuelled primarily by housing, food, and medical care, at a time when gasoline prices are retreating from summer highs.

Hence, the “Core” inflation, which strips out food and energy costs rose 6,6% in September, up from 6,3% in August, hitting its highest level since August 1982.

The higher-than-expected “Core” rate is a negative development for the consumers and the local economy given that there are more contributors to inflation than there are detractors, led by increases in rents, medical care, household furnishings, and new and used cars.

Market reaction:

Investors interpreted the red-hot U.S. inflation data as not as bad as it initially appeared and that the inflation will peak soon, rushing back into riskier assets such as stocks, risk-sensitive currencies, growth-led commodities, and cryptocurrencies, at a time dragging out some profits from the haven dollar.

S&P 500 index, 15-minute chart

As a result, the Wall Street indices closed sharply higher on Thursday, reversing the earlier 2% sell-off after the CPI data, and staging a historic turnaround rally.

For instance, S&P 500 index was rallying by over 2% in early Thursday’s session amid the risk-on mood ahead of the CPI report, but collapsed by more than 2% on the data, before posting an enormous reversal and ending the day with 2,60% gains for the first time after a six-day losing streak.

A similar picture is seen in the Dow Jones which ended Thursday’s session up 827 points, or +2,83%, after being down more than 500 points earlier in the day, posting 1,500 points swing led by gains in energy and bank stocks.