U.S Stocks: Directional Fate of S&P 500, Dow Jones, and Nasdaq100 Tied to CPI after NFP Selloff

Oct 9, 2022
VOT Research Desk

Key News – Insights and Analysis

The Market Perspective:

NASDAQ-100, S&P 500, and Dow Jones PRINCIPAL PREDICTION: NEUTRAL

After the non-farm payrolls jobs report on Friday, major US stock indices plunged.

The likelihood that the FOMC will increase interest rates by 75 basis points next month is about 100%, according to rate traders.

The direction of the S&P 500, Dow Jones, and Nasdaq100 will be determined by the upcoming US CPI.

According to Fed funds futures and overnight index swaps (OIS), a print hardened chances for a 75-basis point rate hike to near 100% following an in-line US jobs report. Fed funds futures anticipated a 75-bps hike at the November 2 FOMC by 87.8% prior to the NFP. After the report reached the wires, those odds increased to 96%.

During the New York trading session, the policy-sensitive 2-year yield increased by approximately eight basis points as Treasury rates moved up the curve. Given that rates are at multi-year highs, which typically encourage investment in the “nearly risk-free” instruments, the subdued appetite for government bonds is causing concern for some.

Monday’s holiday closure of the US bond market may result in increased market volatility. With 3-year, 10-year, and 30-year bond sales scheduled for later in the week, the auction schedule for Treasuries includes approximately $90 billion. Although it is anticipated that debt appetite will be weak, these auctions may be instructive. Yields could rise even higher as a result, putting additional pressure on stocks.

However, the most well-known market event for both equity traders and the global financial system is the consumer price index (CPI) in the United States. All eyes are on Jerome Powell, Chair of the Federal Reserve, and what he and his lieutenants intend to do in the future. Core inflation, which excludes food and energy, is expected to rise to 6.5%, according to analysts. Here, the CPI inflation data are easy to understand: a print that was higher than anticipated would likely cause the market to sell off even more, bolstering the Fed’s attitude of fighting inflation, whereas a print that was lower than expected would likely have the opposite effect.

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