Stocks in the United States fell after a report showed that year-ahead inflation expectations increased for the first time in seven months. The Dollar rose while Treasuries fell.
The S&P 500 finished near the day's lows, down more than 2%. The growth-sensitive Nasdaq 100 fell the most, dropping nearly 3% as Treasury yields rose, with the 2-year rate returning to 4.5%. Both indices experienced their first weekly declines of the month.
Equity markets fell sharply after a University of Michigan survey found that year-ahead inflation expectations rose in early October, while the long-term outlook improved. The increase may be concerning for the Federal Reserve's efforts to keep views anchored. It also comes on the heels of data released the day before that showed a key measure of consumer prices accelerated to a 40-year high in September. However, stocks roared back from early losses on Thursday, in one of the biggest reversals in history.
In the most recent Fed comments, officials indicated that they are prepared to raise rates more aggressively than previously planned. Kansas City Fed President Esther George stated that the terminal rate may need to be raised in order to cool prices. The San Francisco Fed's Mary Daly stated that raising to restrictive levels and to between 4.5% and 5% is the most likely outcome.
Forecasts released last month showed rates reaching 4.4% by the end of the year and 4.6% the following year, up from a current target range of 3% to 3.25%. Following strong payrolls and hot inflation readings, swaps traders have increased bets on rate hikes over the past week, with the market leaning toward back-to-back jumbo hikes at the next two meetings and a high above 4.9% next year.
Bonds and the Sterling fell in the United Kingdom, capping off another turbulent week. Gilts fell as Prime Minister Liz Truss confirmed a reversal on a planned corporation tax freeze. On Friday, the Bank of England completed its emergency bond purchases, purchasing £1.45 billion in long-dated and inflation-linked Gilts. Following that, 30-year yields rose 23 basis points to 4.78%, following a drop of more than 30 basis points earlier.
