- Kalshi Kit
- You Missed the Market Collapse
You Missed the Market Collapse
It's over, not overdue
The world's financial capital isn't dying. It's dead.
As we know it, at least. Every day, we're hit with a new mix of economic signals that try to tell us whether or not we're in or entering a recession. This week, we're going to take a step back and dive into the unwinding of Wall Street and its broader implications for our financial system. But before we dive into that thoroughly sensationalist introduction, it will be a big week ahead in both the domestic and international markets. Let's recap what's top of mind for traders:
This morning, the Labor Department reported its consumer-price index rose 8.3% in August from the same month a year ago. This is down from 8.5% in July and from 9.1% in June. Core inflation, which excludes more volatile energy and food prices, modestly increased. This will be the last major inflation data released prior to the Fed’s September 20–21st meeting.
Several economic indicators will be released this week for Europe, including August inflation, business sentiment and industrial production. Across the globe, China will publish key data concerning retail sales and industrial production.
Europe policymakers will keep working to ease the burden of high energy prices for both businesses and consumers. Russia’s relationship with Europe is likely to experience additional developments given tensions over the Nord Stream 1 pipeline shutdown. President Vladimir Putin is expected to meet with China’s President Xi Jinping on Thursday.
Deep Dive: The City Has Fallen
Wall Street is more of a concept than a place. But it’s been decades since most big-name financial firms were housed in Manhattan’s Financial District. Starting in the 1970s, the great migration began.
So why has the infamous Street cooled off? And what does it mean for the city and country at large?
Proximity is efficiency. Whether it’s in the office or the bars, the flow of information between bankers concentrated in Wall Street was just about as glamorous as the role itself. The New York Stock Exchange was their anchor, rooting not just the banks but also brokers and securities law firms until the early 1970s.
The anchor was paper.
At the time, the checks and securities were physical. The introduction of the IBM mainframe in the late 1960s, paired with the adoption of CUSIP to track securities, shook this tradition to its core. With the paper weight removed, Wall Street’s whales were free to move out of downtown.
The cracks were starting to appear. Then the September 11th attacks happened. Backup facilities outside the city were expanded, and more firms began moving uptown.
New York office occupancy is still below 40% of pre-pandemic levels, according to keycard swipes tracked by security company Kastle Systems. With many Midtown offices still empty, small businesses that rely on office workers are gravitating toward other neighborhoods.
The geography of the city is up for grabs, with banks looking more and more like tech firms every day. At least, that was until this year’s downturn in deal-making and runaway inflation. Now, the city’s financial titans are reportedly preparing rounds of layoffs.
The proximity inherent in New York City’s glamor for the last generation is faltering. Wall Street is slipping. And inflation is here for another long-standing tradition.
The “pizza principle” is a mainstay of New York economics. Put simply, a slice of cheese pizza should always be the same price as a subway ride. The rule has largely held true since first conjectured in the New York Times in 1980. Since then, any increase in pizza prices typically predicted a matching hike in public-transit fares.
Not anymore. For the first time in history, prices in all five boroughs are above $3. Across the city, local business owners cite that a regular slice is $3.75 and soon going to $4.
Blame Your Pizza on Inflation
Despite the exceedingly high cost of living across America, analysts expected inflation to begin cooling off. But this morning’s August Consumer Price Index report came in scathing.
August’s Consumer Price Index report is hotter than expected off the presses. Is this morning’s CPI report a setback or a reset?
The Bureau of Labor Statistics released August’s inflation report this morning, and someone must’ve told them they weren’t invited to Biden’s upcoming Inflation Reduction Act party. So they released a laundry list of things that aren’t reducing.
First, let’s review this morning’s print:
CPI MoM: 0.1%, Expected -0.1%, Previous 0.0%
CPI YoY: 8.3%, Expected 8.0%, Previous 8.5%
Core CPI MoM: 0.6%, Expected 0.3%, Previous 0.3%
Core CPI YoY: 6.3%, Expected 6.0%, Previous 5.9%
Most notably, all core CPI (ex-food and energy) measures came in above forecasts. Shelter, food and medical care were among the largest contributors to price growth.
Today’s report signals the ever-present chasm between political sentiment and reporting versus the reality for everyday Americans. More, the gap between Wall Street’s prediction accuracy and consumer reality is deepening.
Financial markets were reeling after the CPI data was published, coming in substantially higher than both economists and traders had expected. It didn’t get any brighter by the opening bell. The Dow industrials dropped more than 800 points in morning trading, falling alongside the S&P 500 and the Nasdaq Composite. Meanwhile, investors sold off the 2-Year Treasury yield, sending the policy-sensitive yield to a fresh 2007 high.
That being said, August’s numbers suggest Americans did receive some relief at the gas pump. Gas prices fell 10.6%, the biggest monthly drop in more than two years. Today’s AAA national average for gas sits at $3.71. New York tells a grimmer tale. The average price of gas in New York state is $3.87.
For your background, we synthesized a list of things that $3.71 isn’t:
End of list.
It will be a long road ahead towards the Fed’s inflation target. Price pressures are still historically elevated and widespread. So is this a big reset or a setback?
The 75 bps hike on September 21st is 100% priced in, increasing from 3.00% to 3.25%. In its history, the Fed has never failed to deliver when something is 100% priced in.
Sights are already setting on the Fed’s next November 2nd meeting. Kalshi odds of a 75+ bps hike went from 80% to 96%, and the chance of a 100 bps hike went from 2% to 9%. Our market is edging its end-of-year projection upwards from 3.75 - 4.00% to a 50/50 chance of 4.00 - 4.25%
In the News 📰
We received a nod from The Wall St. Journal last Friday in depicting why Susquehanna’s co-founder thinks prediction markets can solve our biggest problems.
Our co-founder and CEO Tarek joined Yahoo! Finance Live yesterday to discuss our new asset class, election contracts and inflation.
Market Watch 👀
Gas price this week🛢️
>$3.55 Yes: 66¢ No: 34¢
Kalshi markets are forecasting a 66% chance that the average price of gas will be above $3.55 by 5PM EDT this Friday. On the flip side, markets are predicting a 34% chance that the price of gas will fall below $3.55 by September 16th.
Economists expected the steady decline in gas prices throughout last month to lead to a 0.1 percent decline in monthly inflation, yet it did not. ZipRecruiter chief economist Sinem Buber believes that gas prices' volatility can easily lead it to jumping once again over the winter.
Gas prices are down 25% from their peak of $5.02 on June 14, 2022, due to an assortment of factors affecting the global energy market. Some analysts predict that more drivers switching to electric vehicles, paired with stations now switching over to cheaper winter gasoline, will push prices down further.
S&P500 Weekly Close Price📈
3950-3999.99? Yes: 24¢ No: 76¢
Kalshi markets are predicting a 76% chance that the S&P 500 index value will fall outside 3950 and 3999.99 at the end of September 16, 2022 (4PM ET). On the other hand, markets are forecasting a 24% chance that the index will fall within the 3950 and 3999.99 range by market close.
Stocks had been on a four-day winning streak prior to Tuesday’s plunge. Today's CPI was against the trend of what had appeared to be some moderation across most indicators of growth and pricing pressure.
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