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.
In fact, investors pushed up expectations that the Fed will deliver another rate hike of 75 basis points at its December meeting. The odds for a three-quarter-point increase for the last meeting of 2022 jumped to 61.8% from 32.5% a day earlier. And that would follow an increase of the same size that is widely seen for the November meeting.
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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1. The stock market's sudden reversal to soaring heights came as no surprise to technical analyst Katie Stockton at Fairlead Strategies, who said that the S&P 500 was poised for a test of key support at 3,505, which could come before a "significant relief rally." She also noted that stocks historically have performed well in the month of October, which other analysts have dubbed a "bear market killer."
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.
"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.
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.
4. There's reason to believe the stock market is close to its low point, according to RBC. Top US stock strategist Lori Calvasina expects a recovery after some further choppiness. She listed three reasons a double-digit recovery could be in store in 2023.
5. Wharton professor Jeremy Siegel warned the Fed will drive the economy into a depression if they wait for core inflation to fall back to 2%. He told CNBC on Thursday that the Fed's focus on lagging indicators is setting the economy up for disaster. Leading inflation indicators are coming down substantially, especially in the housing market, he added.
6. Officials in the Biden administration are growing concerned that a Russian oil price cap could backfire. Sources told Bloomberg that OPEC+'s cut to its oil production quota is undermining the Western effort to limit Moscow's oil revenue. The cartel's move has already added to volatility in markets, and a price cap on Russian oil could trigger a spike in crude, they said.
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.
8. Morgan Stanley now expects home price growth to turn negative in 2023 as mortgage rates surge to their highest levels since 2007. Average 30-year mortgage rates, by some measures, now sit above 7%. Here are four charts that show how extreme conditions in the housing market have become.
9. One real estate investor used various strategies to get upfront cash to build his portfolio. He never made more than a $52,000 salary, but built a 25-unit real estate portfolio. Here are four strategies he used to buy investment properties.
10. The British pound jumped against the US dollar on Thursday following reports the UK government may ditch additional parts of its mini-budget. Prime Minister Liz Truss already abandoned a tax cut for top earners last week after her initial plan sent the sterling's exchange rate vs. the greenback to a record low last month. Reports said the government may now allow the corporate tax rate to rise next year instead of staying flat.
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Curated by Jason Ma in Los Angeles. Feedback or tips? Email jma@insider.com.
Edited by Max Adams (@maxradams) in New York and Hallam Bullock (@hallam_bullock) in London.