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Markets plunged Thursday morning after inflation data stoked fears on Wall Street that the Federal Reserve would continue to raise interest rates aggressively. Then something strange happened.
Stocks made a tremendous comeback. The Dow Jones Industrial Average rose 1,500 points from its peak and the S&P 500 had its widest trading range since March 2020, ending the day up more than 2%.
What’s happening: The consumer price index, or CPI, rose 0.4% in September from the previous month, double the 0.2% estimate by analysts polled by Refinitiv. During the year, inflation increased by 8.2%.
The Fed can’t be happy with the report. In the minutes of the September meeting released on Wednesday, officials expressed concern about the “risk of significant adverse effects on the economic outlook” if inflation continues to accelerate.
So what explains the wide divergence between the markets and the seemingly outrageous inflation figure? A stronger-than-expected inflation report means price increases are nearing their peak. The rollercoaster market shows how investors are desperately trying to figure out what the Fed is going to do.
Meanwhile, rampant inflation is hitting households hard, Highlighting the disconnect between Wall Street and Main Street.
Big picture: Household wealth is on track for its first significant decline since the 2008 financial crisis, according to a new report by financial services company Allianz.
Global assets will shrink by more than 2% in 2022, Allianz reports. This means that households will, on average, lose a tenth of their wealth this year.
The report paints a grim picture. The financial crisis of 2008 had a relatively quick turnaround, but current forecasts show stagnant growth in the future. The average growth of financial assets is expected to be around 4.6% until 2025, compared to 10.4% in the last three years.
Russia’s war on Ukraine has hampered the prospect of a post-pandemic economic recovery and exacerbated food and energy shortages. Inflation is rampant and central banks around the world are raising borrowing costs. Stock markets may end the year in the red: 2021 could be the last year of the ‘old normal’, with low interest rates and rising stocks,” Allianz researchers wrote.
Household debt, on the other hand, has increased all over the world. “The context of rising interest rates and higher living costs may pose a risk to household balance sheets,” the researchers report.
Takeaway: Allianz calls these changes a “tectonic shift” in global wealth that will take years. Today’s release of US retail sales for September will likely shed more light on the state of the consumer, as will earnings reports from some of the country’s biggest lenders: JPMorgan ( JPM ), Citigroup ( C ), Wells Fargo ( WFG ) and Morgan Stanley. (MS) all reports this morning.
US mortgage rates rose again this week, even closer to 7%.
The 30-year fixed-rate mortgage averaged 6.92% in the week ended Oct. 13, up from 6.66% the previous week, according to Freddie Mac. That’s the highest average rate since April 2002.
The upward shift has been rapid: just a year ago, the 30-year fixed rate was at 3.05%. Mortgage rates doubled in the past year as the Federal Reserve went on an unprecedented campaign to raise interest rates to combat rising inflation.
A combination of central bank rate hikes, investor worries about the recession and mixed economic news has made mortgage rates volatile in recent months, reports colleague Anna Bahney.
“We continue to see a tale of two economies in the data,” said Freddie Mac Chief Economist Sam Khater. “Strong employment and wage growth are keeping consumer balance sheets positive, while persistent inflation, recession fears and housing affordability are dampening housing demand.”
Doing math: A year ago, a buyer who put 20 percent down on a $390,000 home and financed the rest with a 30-year, fixed-rate mortgage at an average interest rate of 3.05 percent had a monthly mortgage payment of $1,324, Freddie estimates. Mac.
Today, a homeowner buying the same priced home at an average rate of 6.92% would pay $2,059 a month in principal and interest. That’s an extra $735 per month.
What’s next: The coming months will certainly be important for the economy and the housing market, Khater said. Already, home sales are falling, and prices are cooling.
With fewer people looking to buy a mortgage or refinance a home and an uncertain economic picture for the future, credit is becoming increasingly difficult to obtain.
Netflix ( NFLX ) was a safe haven from the constant daily barrage of ads.
That’s no longer the case, says colleague Frank Pallotta.
Netflix on Thursday introduced “Basic with Ads,” an ad-supported subscription plan. The new tier will cost $6.99 per month in the US.
The new option will have much of what’s available with Netflix’s current $9.99 per month Basic plan, but will have an average of four to five minutes of ads per hour. These ads will be 15 or 30 seconds long and will be played before and during TV series and movies.
The debut of the ad-supported subscription plan is an important moment in Netflix’s 25-year history.
“We … run advertising for free,” Netflix said in a letter to shareholders in 2019. “That remains a deep part of our brand proposition.”
But after a nightmare 2022, the platform can no longer sustain this approach.
In April, Netflix reported that it was losing subscribers for the first time in more than a decade.
After that news, the stock plummeted, and the company lost billions in market capitalization. Hundreds of employees were laid off, and doubts about the platform’s future abounded, raising doubts about the viability of the entire streaming market.
After all, Netflix needs more revenue, and ads are one way to get it.
JPMorgan Chase ( JPM ), Wells Fargo ( WFM ), Citigroup ( C ) and Morgan Stanley ( MS ) report third-quarter earnings before the bell.
The US Census Bureau is expected to release September retail sales data at 8:30 a.m. ET.
Next week Next week:
▸ The National Association of Realtors reports home sales for September.
▸ Bank of America (BAC), Goldman Sachs (GS), Johnson & Johnson (JNJ), United Airlines (UAL), American Airlines (AAL), Tesla (TSLA), AT&T (T), Verizon (VZ) third quarter earnings . ) and Netflix (NFLX).