S&P 500 on course for worst day in over a month amid heigthened inflation concerns

• The S&P 500 has continued to push lower in recent trade and currently trades in the 4630s.
• That puts it one course for a near 1.0% drop, it's worst day since the start of October.
• US equities have come under pressure amid heightened inflation fears in wake of a hotter than expected US CPI report.

US equity markets have continued to head lower in recent trade, having been on the back foot since the market open at 1430GMT. Inflation fears are being touted as the major reason for the selling in wake of a much hotter than expected US October Consumer Price Inflation report. For reference, headline CPI came in at 6.2% YoY/0.9% MoM, both metrics well above expectations, while core CPI came in at 4.6% YoY/0.6% MoM, also well above expectations. The YoY rate of headline CPI was its highest since 1990, while the YoY rate of core CPI was at its highest since the early 90s.

The S&P 500 recently dropped below the 4640 level and is currently trading with on the day losses of just shy of 1.0%, putting the index on course for its worst day since 4 October, more than one month ago. Amid the sharpest jump in long-term US government borrowing costs in months, which has seen the 2-year yields rise nearly 10bps, 5-year yields spike nearly 15bps and 10-year yields rally nearly 11bps, the duration-sensitive Nasdaq 100 index is an underperformer. The Dow Jones Industrial Average is nursing losses of about 0.7%, having recently slipped back under the 36K level.

The CBOE S&P 500 Volatility Index also jumped on Wednesday to its highest level in nearly one month, just missing out on hitting the 20.00 mark. On the day, the index is up just under 1.5 vols at the time of writing, the largest one-day jump since the end of September, a day when the S&P 500 dropped 2.0% to close more than 6.0% below the index’s current level.

Inflation fears

Analysts broadly framed the latest CPI report as indicative that inflation pressures in the US are set to both longer-lasting and broader than previously expected. As a result, the Fed’s base case assumption upon which their policy guidance is pinned, that inflationary pressures will fade in mid-2022, is coming under pressure. 5-year breakeven inflation expectations surged to fresh record levels (they can only be calculated back to 2004) above 3.15%, well above the Fed’s 2.0% inflation target, making it harder for Fed members to argue that inflation expectations remain well-anchored. ING said they cannot rule out headline CPI surpassing 7.0% YoY in the months ahead. They expect this to ultimately force the Fed’s hand and expect the QE taper to be accelerated in Q1, followed by a minimum of two rate hikes in 2022.