September inflation data and U.K. turmoil drive market volatility

September CPI data leads to volatile end of the week

Interest rates experienced a volatile end to the week after Consumer Price Index (CPI) data showed consumer prices continued to rise higher than anticipated. According to U.S. Bureau of Labor Statistics data released on Thursday, consumer prices rose 0.4% on a month-over-month basis in September, coming in ahead of an expected 0.2% rise. On a year-over-year basis, prices rose 8.2%. Rates sky-rocketed Thursday morning following the data release, with the 10-year Treasury yield jumping 15 basis points to top 4.00% for the third time in the last three weeks. The 2-year Treasury yield jumped over 20 basis points, briefly rising above 4.50% for the first time since 2007. Both indexes finished the week above those respective levels.

Equity markets staged a stunning turnaround Thursday, with the S&P 500 down 1.3% in the immediate hours after the CPI data release before finishing Thursday up 2.6%. This was the fifth largest intraday reversal in S&P 500 history.

Following the September inflation data, which came in hotter than expected, markets are wrestling with the idea that inflation might not be under control yet. After July (0.0% month-over-month) and August (0.1% month-over-month) appeared to show signs of waning inflation, September’s numbers bring concerns that inflation could be more resilient than previously anticipated.

Following Thursday’s CPI data, markets are pricing a near 100% certainty of a 75-basis-point rate hike at the November 2 Fed meeting. Looking ahead to December, markets are currently pricing in a 65% chance of an additional 75-basis-point rate hike, which would bring the Federal Reserve target rate range to 4.50 – 4.75%.

Corporate borrowers continue to assess their hedging position in this current market. With rates continuing to rise, many are choosing to lock in a fixed rate before rates potentially rise further. Other corporates are utilizing the higher rates to cash out on existing hedges that have become significant assets.

Continued economic turmoil in the U.K.

Markets continue to keep an eye on what is happening across the pond in the U.K. as British Finance Minister Kwasi Kwarteng was fired Friday, less than six weeks after assuming the position. His termination came amidst growing political pressure following Kwarteng’s controversial budget plans which led to rapid weakening of the British pound along with intervention by the Bank of England into U.K. bond markets to help prevent collapse.

Investors continue to closely watch the U.K. market as the two-week emergency bond-buying program set in place by the Bank of England ended last Friday. Prime Minister Liz Truss named former Health Secretary and Foreign Secretary Jeremy Hunt to replace Kwarteng. U.K. market volatility is expected to continue after a tumultuous first five weeks in office for Truss.