Overnight Tuesday, the Dow Jones Industrial Average slumped nearly 1,300 points lower after US inflation came in higher than expected. It was the market's worst day in more than two years.
The ASX 200 has fallen sharply in early Wednesday trade, with heavy losses sustained by the Fortescue Metals Group (ASX: FMG) share price, the Commonwealth Bank of Australia (ASX: CBA) share price, and the Pilbara Minerals (ASX: PLS) share price.
The US inflation print came in at 8.3%, up 0.1% from July, when markets had expected it to fall, largely on the back of lower gasoline prices.
The unexpectedly hot inflation print essentially locked in a 75 basis point increase next week when the US Federal Reserve next meets. According to Bloomberg, the odds for a 100 basis point rate hike jumped more than 20%, with hopes of a "Fed pivot" firmly dashed.
Goldman Sachs sees a more aggressive Federal Reserve and now predicts US interest rates to hit 4 – 4.25% by the end of the year. The current funds rate is 2.25 – 2.5%.
With inflation being the number one enemy, central banks have no option but to keep hiking interest rates until such time that it is back under control. And with US inflation running at over 8%, it's a long way back to the target rate of 2%.
The risk is the sharpest increase in interest rates in many decades slams the US economy into recession, taking the stock market further down with it.
Jeffrey Gundlach, chief investment officer of DoubleLine Capital, is worried the Fed will go too far.
As reported on Bloomberg, Gundlach told CNBC he prefers the Fed hikes only 25 basis points next week because it hasn't paused long enough to see what effect previous hikes have already had. He fears the Fed might oversteer the economy, potentially sending it into recession.
Gundlach agrees with calls from others, including Scott Minerd from Guggenheim, that stocks will decline 20% by mid-October.
If replicated here in Australia, it would see the ASX 200 crash all the way down to around 5,500, a level not seen since the COVID crash of March 2020.
