A broad-based selloff sent equities to their worst day in more than two years after hotter-than-expected inflation data fueled bets on a jumbo hike by the Federal Reserve next week. Treasury yields surged and the dollar gained.

Across the board selling sent the S&P 500 down more than 4 per cent, while the tech-heavy Nasdaq 100 losses surpassed 5 per cent as yield-sensitive stocks took the biggest hit. Both benchmarks are poised for their worst one-day routs since 2020. Swaps traders are now fully pricing in a rate increase of three-quarters of a percentage point, with wagers rising for a similar move in November and policy rates ultimately reaching around 4.3 per cent early in 2023.

The two-year Treasury yield, the most sensitive to policy changes, jumped as much as 22 basis points, pushing it more than 30 basis points above the 10-year rate and deepening an inversion in what is generally a recession warning.

The consumer price index increased 0.1 per cent from July, after no change in the prior month, Labor Department data showed Tuesday. From a year earlier, prices climbed 8.3 per cent, a slight deceleration but still more than the median estimate of 8.1 per cent . So-called core CPI, which strips out the more volatile food and energy components,  also topped forecasts. 

 “Overall, today was a surprising day against the trend of what had appeared to be some moderation across most indicators of growth and pricing pressure, so the Fed’s job is clearly not finished,” Rick Rieder, the chief investment officer of global fixed income at BlackRock Inc., the world’s biggest asset manager, wrote. “We think the Fed will pause the rate hiking cycle potentially at year-end, but maybe now the central bank will have to wait a bit longer to do that after having reached a restrictive policy stance.”

More comments

• “Headline inflation has peaked but, in a clear sign that the need to continue hiking rates is undiminished, core CPI is once again on the rise, confirming the very sticky nature of the US inflation problem,” Seema Shah, chief global strategist at Principal Global Investors, said in a note. “In fact, 70 per cent  of the CPI basket is seeing an annualized price rise of more than 4 per cent  month-on-month. Until the Fed can tame that beast, there is simply no room for a discussion on pivots or pauses.”
• “The CPI report was an unequivocal negative for equity markets,” wrote Matt Peron, director of research at Janus Henderson Investors. “The hotter than expected report means we will get continued pressure from Fed policy via rate hikes. It also pushes back any ‘Fed pivot’ that the markets were hopeful for in the near term.”
• “Core cost-of-living prices falling when labor markets are tight with nominal wages rising rapidly is not going to produce the soft-landing fairy tale,” Steven Blitz, chief US economist at TS Lombard, said. “The Fed had better odds of rolling a hard eight than engineering a soft landing.There is no Fed pivot to prevent one, there is no turning back from the path they are on.”
• “Although today’s announcement shows that inflation remains historically high, there may be signs that the pressure of inflation is abating,” said Richard Flynn, managing director of Charles Schwab UK. “Company inventories are rising relative to sales, global economic growth has weakened, and the U.S. dollar is strong -- all indications that price hikes may begin to slow soon. That being said, inflation is still far-above the Fed’s target.”
• “I’d buy this dip,” said Peter Tchir, head of macro strategy at Academy Securities. “There are bigger issues facing us, but this seems like an algo driven response to the data, chasing out recent weak longs, so I’m a buyer of stocks and bonds here.”

On the corporate front, Twitter Inc. shareholders approved Elon Musk’s proposed US$44 billion buyout, paving the way for a trial next month. JPMorgan Chase & Co. says deal fees may fall by half in the third quarter, and Citigroup Inc. warned trading revenue in the third quarter will likely drop as a slowdown in its business dedicated to securitized products crimps fixed-income trading revenue.

The latest inflation data came amid debate about the outlook for the global economy and how that will affect markets. While stocks rallied in recent days, with the S&P 500 completing its biggest four-day surge since June on Monday, Bank of America Corp.’s latest survey showed the number of investors expecting a recession has reached the highest since May 2020.

A gauge of the dollar climbed more than 1 per cent, advancing against all of its Group-of-10 counterparts. Bitcoin fell 10 per cent.

.Here are some key events to watch this week:

• UK CPI, Wednesday
• US PPI, Wednesday
• US business inventories, empire manufacturing, retail sales, initial jobless claims, industrial production, Thursday
• China home sales, retail sales, industrial production, fixed assets, surveyed jobless rate, Friday
• Euro area CPI, Friday
• US University of Michigan consumer sentiment, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 4.3 per cent as of 4 p.m. New York time
• The Nasdaq 100 fell 5.5 per cent
• The Dow Jones Industrial Average fell 3.9 per cent
• The MSCI World index fell 3.4 per cent

Currencies

• The Bloomberg Dollar Spot Index rose 1.2 per cent
• The euro fell 1.5 per cent to US$0.9973
• The British pound fell 1.6 per cent to US$1.1500
• The Japanese yen fell 1.2 per cent to 144.49 per dollar

Bonds

• The yield on 10-year Treasuries advanced six basis points to 3.42 per cent
• Germany’s 10-year yield advanced eight basis points to 1.73 per cent
• Britain’s 10-year yield advanced nine basis points to 3.17 per cent

Commodities

• West Texas Intermediate crude fell 0.3 per cent to US$87.55 a barrel
• Gold futures fell 1.6 per cent to US$1,712.80 an ounce