The Fed isn't about to back down from its inflation fight

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By Julia Horowitz • Thursday, October 20

Good morning. It's me again! Back for one day only as Nicole wraps up a seminar. She promises she's learning a lot. In today's newsletter: Expectations for the Fed have firmed up. Plus, Tesla expects to miss its 2022 delivery target, and Jeff Bezos thinks it's time to "batten down the hatches."

US stock futures are struggling to find direction. Markets in Europe were mixed in early trading, while stocks in Asia tumbled.

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What's happening now in markets:

▲ Dow futures 30,614 (+0.51%)

▲ S&P futures 3,719 (+0.32%)

▲ Nasdaq futures 11,173 (+0.17%)

▲ US 10-year yield 4.127%

▲ Gold $1,641.90 (+0.47%)

▲ US oil $86.14 (+1.92%)

▲ Bitcoin $19,221.70 (+0.51%)

MARKET DATA AS OF 8:15 AM EDT

MARKET FLASH

The Fed isn't about to back down from its inflation fight

Twelve days from now, the Federal Reserve will meet again, and expectations for the central bank's next moves are firming up. The consensus among investors: Persistently hot inflation means the Fed will need to continue with its string of aggressive interest rate hikes, which is unprecedented in the modern era.

What's happening: Markets see a 99% probability that rates will rise by another three-quarters of a percentage point, reaching a range of 3.75% to 4%.

A hike of that magnitude is now "a given," Quincy Krosby, chief global strategist for LPL Financial, told clients on Wednesday. "Concern is now focused on December, and whether the Fed is prepared to transition to smaller rate hikes."

That's up from a 60% probability one month ago. So what changed?

Inflation, mainly. The US Consumer Price Index rose 8.2% in the year to September after rising 8.3% annually in August. While CPI peaked at 9.1% in June, that reading was still uncomfortably elevated and higher than economists had expected.

The 6.6% annual uptick in shelter costs was of particular concern. It takes longer for housing expenses to come back down than some other categories, since renters tend to sign leases for 12-month periods. The monthly rise in core services costs (excluding energy) was the largest gain in three decades.

The data underscored the need for the Federal Reserve to stay tough — while a strong jobs report for September will deliver confidence the central bank can do so without causing undue harm to the US economy.

Fed officials have said as much. In an interview with Reuters on Friday, St. Louis Fed President James Bullard said inflation had become "pernicious," which means that "frontloading" larger rate hikes is logical.

The market impact: The S&P 500 kicked off the week with a 3.8% rally before dropping 0.7% on Wednesday. It's still plodding along in a bear market, about 23% below its January peak. So long as the Fed signals its intention to keep the pressure on, boosting the odds of a US recession, volatility is expected to persist.

Even relatively solid corporate earnings may not be sufficient to change the direction.

"So far, the results are decent, but they're being compared to consensus estimates that have been persistently lowered since early summer," noted strategists at Charles Schwab.

VOICES

'Dr. Doom' thinks the Fed will lose its inflation battle

"My view is they're going to wimp out, and they're going to blink."

ECONOMIST NOURIEL ROUBINI

Watch his full interview with CNN Business.

EARNINGS MONITOR

Tesla will miss its 2022 delivery target

Tesla posted a solid quarter of earnings and record revenue, but now says it will likely fall short of its target for a 50% growth in the number of cars it sells this year.

Quick rewind: As recently as July, the company said it was still aiming for a target of 50% growth from the 936,000 cars it delivered in 2021.

But with two quarters of disappointing deliveries caused by supply chain issues and Covid-related shutdowns in China, that goal has looked increasingly out of reach.

CEO Elon Musk said that the electric carmaker is not struggling with demand.

"We expect to sell every car that we make, for as far in the future as we can see," he said on a call with analysts on Wednesday.

Instead, the company said it would "just" miss its target due to complications with delivery of cars from its factories to customers at the end of the year.

Shares are down 5% in premarket trading on Thursday. They've dropped 37% year-to-date, compared to a 22.5% fall in the S&P 500.

"This quarter was not roses and rainbows," said Dan Ives, tech analyst for Wedbush Securities. "Competition is increasing. There are some logistical challenges."

UP NEXT

American Airlines, AT&T, Dow, Nucor and Quest Diagnostics report results before US markets open. CSX, Snap and Whirlpool follow after the close.

Also today →
▸ Initial US jobless claims for last week post at 8:30 a.m. ET.

▸ Existing home sales for September follow at 10 a.m. ET.

Coming tomorrow: Earnings from American Express and Verizon.

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WHAT WE'RE READING AND WATCHING

▸ Twitter scares LVMH's CEO into ditching his private plane (CNN Business)
▸ Why Uber is launching an advertising unit (CNN Business)

▸ Japan's yen just hit its lowest level against the dollar since 1990 (WSJ)
▸ Elon Musk says he's 'obviously overpaying' for Twitter (Bloomberg)
▸ Rare good news on CO2 emissions from fossil fuels (CNN Business)
▸ Credit Suisse scrambles to finalize revamp as deadline looms (Reuters)

FINAL WORD

America's CEO are worried and talking about it

America's business leaders are becoming more pessimistic. The Conference Board recently reported a slide in its CEO confidence index, which it said had hit levels not seen "since the depths of the Great Recession."

Of the 136 CEOs who were surveyed, 98% said they were preparing for a US recession over the next 12 to 18 months — and 99% said they were bracing for a recession in Europe.

Notably, the business community is not being quiet about its concerns.

Amazon founder Jeff Bezos tweeted Tuesday that "the probabilities in this economy tell you to batten down the hatches."

He was responding to a clip of an interview with Goldman Sachs CEO David Solomon, who told CNBC that "it's a time to be cautious."

"You have to expect that there's more volatility on the horizon now," Solomon said. "That doesn't mean for sure that we have a really difficult economic scenario. But on the distribution of outcomes, there's a good chance that we have a recession in the United States."