Stocks and bonds were mixed on Thursday, as investors prepared for the last major data release before the Federal Reserve’s decision next month on how much to raise interest rates.
Futures on the S&P 500 were up 0.6 percent in premarket trading, after another drop on Wednesday — the sixth daily decline in a row — took the index to a new low for the year. U.S. government bond yields, which serve as benchmarks for borrowing costs and are influenced by Fed moves, were little changed.
The Consumer Price Index report for September, to be released Thursday morning, will be crucial for informing policymakers, and therefore investors, on how much further interest rates will rise before inflation starts to consistently fall. The report has also taken on greater significance as investors grow increasingly worried about the effects of rising interest rates on global financial stability, following further turmoil in British government bond markets this week.
Based on prices in futures markets, which show where investors expect interest rates to be after the Fed’s upcoming meeting, the forecast is for a three-quarter-point increase. Once a rare occurrence, that would be the fourth increase of that size this year.
If inflation comes in as expected or higher — economists surveyed by Bloomberg expect an annual rate of 8.1 percent — the forecast for a three-quarter-point rate increase would move closer to certainty and stocks would probably fall. Last month’s inflation reading came in higher than anticipated, prompting a sharp sell-off as investors re-evaluated how much more work the Fed had to do to tame rising prices.
“A trajectory of downward trending inflation data is starting to feel like wishful thinking as the data has been coming in choppy at best,” Yung-Yu Ma, the chief investment strategist at BMO Wealth Management, said.
Some investors are still holding out hope for a more cautious move from the Fed, fearful that continued bumper increases in rates could push markets closer to a financial accident, similar to the shock waves in British markets in recent weeks.
A lower-than-expected inflation reading could strengthen that hope, potentially pushing stocks higher as investors entertain the possibility that the Fed could be more cautious and raise interest rates by less than predicted.
