Stocks crash as US inflation remains hot

MANILA, Philippines — World markets slipped yesterday after Wall Street fell the most since June 2020 as a report showed inflation has kept a surprisingly strong grip on the US economy.

At the local market, the benchmark Philippine Stock Exchange index (PSEi) fell by 118.95 points or 1.77 percent to 6,582.86, while the broader All Shares index dropped to 3,497.21, down 45.62 points or 1.29 percent.

“The PSE index dropped after US inflation data came in higher than expected, paving the way for the Fed to continue their hawkish stance,” AB Capital Securities said in a note.

Traders said the still hot inflation in the US dashed investors’ hopes that the US Federal Reserve would pull back on its aggressive monetary stance.

Joseph Roxas of Eagle Equities attributed yesterday’s bloodbath “to the US inflation data, which signals another hefty increase by the US Federal Reserve next week.”

He said the local stock market plunged along with the global downturn.

A report on Tuesday showed US inflation slowed only to 8.3 percent in August, instead of the 8.1 percent economists expected. This dashed hopes that inflation was falling back to more normal levels after peaking in June at 9.1 percent, allowing the Fed to moderate its interest rate hikes.

Now, traders are bracing for the Fed to ultimately raise interest rates more than expected to combat inflation, with all the risks for the economy that this entails.

Tensions between the US and China were also weighing on sentiment. Chinese leader Xi Jinping and Russian President Vladimir Putin are due to meet later in the week, underscoring the countries’ warming ties as the West pushes ahead with sanctions against Moscow for its invasion of Ukraine.

The meeting Thursday in Samarkand, Uzbekistan, on the sidelines of a summit of a security pact dominated by Moscow and Beijing, reflects the strong ties between the former Communist rivals now locked in rivalry with the US.

Traders now see a one-in-three chance the Fed may hike its benchmark rate by a full percentage point next week, quadruple the usual move.

The Fed has already raised its federal funds rate four times this year, with the last two increases by three-quarters of a percentage point. The rate is currently in a range of 2.25 to 2.50 percent.

Higher rates hurt the economy by making it more expensive to buy a house, a car or anything else usually purchased on credit. Mortgage rates have already hit their highest level since 2008, creating pain for the housing industry. The hope is that the Fed can pull off the tightrope walk of slowing the economy enough to snuff out high inflation, but not so much that it creates a painful recession.

Tuesday’s data casts doubt on hopes for such a “soft landing.” Higher rates also hurt prices for stocks, bonds and other investments.

Expectations for a more aggressive Fed have also helped the dollar add to its already strong gains for this year. The dollar has been surging against other currencies in large part because the Fed has been hiking rates faster and by bigger margins than many other central banks.