Stock ETFs Surge Despite Hot Inflation Report

When it comes to movements in stock prices, there are few things more important than expectations.

Immediately after the government reported the consumer price index rose by 0.4% from August to September—double what economists were expecting—stocks expectedly sold off. From a premarket gain of 1%, the SPDR S&P 500 ETF Trust (SPY) fell as much as 2.4% 10 minutes after the market opened. 

But those losses didn’t last. Just minutes later, the fund surged and surged some more. As of market close Thursday, SPY was up 2.64% on the session, for a swing of more than 5%. 

Ugly Inflation Report  

In addition to the hotter-than-expected 0.4% gain in the headline CPI, today’s data showed an even bigger 0.6% increase in the core CPI, which strips out food and energy prices. It was the second-straight month that core consumer prices grew by that much and the fifth month out of the last six that core prices grew by at least 0.6%.

Month-over-month growth of that magnitude translates into an annual inflation rate of more than 7%–well beyond the Fed’s 2% target. So, this will keep pressure on the U.S. central bank to keep hiking rates aggressively, perhaps all the way up to 5% (as the market is currently pricing in) or beyond.

There are no silver linings in the fact that inflation is proving to be more stubborn than many had thought.

But at least you could say that heading into today, an S&P 500 and Nasdaq that were down more than 25% and 35%, respectively, had priced in a lot of bad news. 

Counter Rally 

With expectations so depressed, even today’s downbeat inflation report couldn’t stop the market from experiencing a much-needed relief rally. 

For now, that’s all this is: a countertrend rally after six-straight days of declines. That doesn’t mean it can’t turn into something more sustainable, but even if it does, it won’t be because of today’s CPI report.

As I wrote in today’s Morning Exchange newsletter: 
 
One thing working in the bulls’ favor this time is the fact that the market, as measured by SPY, is sitting right at its lows for the year ahead of the CPI release. Last time around, it was up 12% from its bottom. 

With investors already bracing for bad news, perhaps the market will be more forgiving regardless of what numbers we see today.  

Investors were certainly in a forgiving mood! 

Email Sumit Roy at [email protected] or follow him on Twitter @sumitroy2