Tuesday’s Selloff Implies Markets Will Likely Retest June Lows

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The stock market saw a steep decline on Tuesday after the consumer price index (CPI) report showed that inflation came in higher than expected in August, shaking investors’ confidence and increasing the chances of another aggressive interest rate hike at the next FOMC meeting.

According to the U.S. Bureau of Labour Statistics (BLS), inflation rose 0.1% month-on-month in August as higher food and shelter costs offset a drop in gas prices. Year-over-year, inflation stood at 8.3% last month. Core inflation, which does not factor in volatile gas and food prices, rose 6% on a monthly basis. These compare with analysts’ expectations of a 0.1% decline in overall inflation and a 0.3% surge in core inflation.

The CPI print came just a week before the Fed’s September 20-21 meeting, where the U.S. central bank is expected to impose a third straight 75 basis points interest rate hike to bring down inflation closer to its 2% target. Some investors hoped for a bigger drop in inflation, which would increase the chances of the Fed slowing down the pace of interest rate hikes.

Although the 75bp rate hike was all but priced in for the next week, the hotter-than-expected CPI print has now pushed markets to start pricing in a 100bp rate hike. Citi economist Andrew Hollenhorst told clients this week that a 100bp rate hike is “possible but relatively unlikely.”

Still, the mere fact that the market has begun to price in such an aggressive move means that tech stocks are likely to stay under extensive selling pressure, especially in growth parts of the market.