A ‘tectonic shift’ in global wealth that will take years to recover from

(CNN) — Markets plunged on Thursday morning after red-hot inflation data raised fears on Wall Street that the Federal Reserve would continue hiking interest rates aggressively. Then, something strange happened.

Stocks staged a massive comeback. The Dow Jones Industrial Average surged 1,500 points from peak to trough and the S&P 500 posted 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 from analysts surveyed by Refinitiv. On an annual basis, inflation was up 8.2%.

The Fed can’t be happy about the report. In the minutes of the its 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 sharp divergence between markets and seemingly terrible inflation data? Investors could be betting that the stronger-than-expected inflation report means price increases are near their peak. The rollercoaster market illustrates how investors are desperately grasping for clues about what the Fed will do next.

In the meantime, unbridled inflation is hitting households hard, highlighting a disconnect between Wall Street and Main Street.

The big picture: Household wealth is on track for its first significant reduction since the financial crisis in 2008, according to a new report by financial services company Allianz.

Global assets are set to decline by more than 2% in 2022, Allianz reports. That means households, on average, will lose about a tenth of their wealth this year.

The report paints a bleak picture. The 2008 financial crisis was marked by a relatively quick turnaround, but the current outlook shows stagnant growth in the future. The average growth of financial assets is expected to be around 4.6% until 2025, compared with 10.4% over the last three years.

Russia’s war on Ukraine has obstructed the potential for a post-pandemic economic recovery, and increased food and energy scarcity. Inflation is rampant and central banks around the world are raising borrowing costs. Stock markets are likely to end the year in the red– 2021 "might have been the last year of the old ‘new normal’, with low interest rates and bullish stock markets," wrote Allianz researchers.

Household debt, meanwhile, has been on the rise globally. "The context of rising interest rates and the higher cost of living could pose a risk to household balance sheets," reported researchers.

The takeaway: Allianz calls these changes a "tectonic shift" in global wealth that will take years to recover from. 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 largest lenders — JPMorgan, Citigroup, Wells Fargo and Morgan Stanley all report this morning.

Mortgage rates hit a 20-year high

Mortgage rates in the US rose again this week — inching even closer to 7%.

The 30-year fixed-rate mortgage averaged 6.92% in the week ending October 13, up from 6.66% the week before, according to Freddie Mac. That’s the highest average rate since April 2002.

The upward shift has been swift: Just a year ago, the 30-year fixed rate stood at 3.05%. Mortgage rates more than doubled in the past year as the Federal Reserve pushed ahead with its unprecedented campaign of hiking interest rates in order to tame soaring inflation.

The combination of the central bank’s rate hikes, investor’s concerns about a recession and mixed economic news has made mortgage rates volatile over the past several months, reports my colleague Anna Bahney.

"We continue to see a tale of two economies in the data," said Sam Khater, Freddie Mac’s chief economist. "Strong job and wage growth are keeping consumers’ balance sheets positive, while lingering inflation, recession fears and housing affordability are driving housing demand down precipitously."

Doing the math: A year ago, a buyer who put 20% 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% had a monthly mortgage payment of $1,324, according to calculations from Freddie Mac.

Today, a homeowner buying the same-priced house with an average rate of 6.92% would pay $2,059 a month in principal and interest. That’s $735 more each month.

What’s next: The next several months will undoubtedly be important for the economy and the housing market, said Khater. Already, home sales are dropping, and prices are cooling.

With fewer people looking to purchase a mortgage or refinance a home and an uncertain economic picture ahead, credit is getting harder to come by.

Netflix with ads is here

Netflix was once a safe-haven from the constant everyday barrage of advertisements.

That’s no longer the case, reports my colleague Frank Pallotta.

Netflix unveiled "Basic with Ads," its much anticipated ad-supported subscription plan, on Thursday. The new tier will cost $6.99 a month in the US.

The new option will feature much of what’s available with Netflix’s current $9.99 a month Basic plan, but will include an average of four to five minutes of commercials per hour. Those ads will be 15 or 30 seconds in length and will play before and during TV series and movies.

The debut of the ad-supported subscription plan is a momentous moment in Netflix 25-year history.

"We … are advertising free," Netflix said in a letter to shareholders in 2019. "That remains a deep part of our brand proposition."

But after a nightmarish 2022, the platform can no longer stick to that approach.

In April, Netflix disclosed that it lost subscribers for the first time in more than a decade.

Following that news, the stock tumbled, and the company lost billions in market cap. Hundreds of employees were laid off, and doubts ran rampant about the platform’s future, raising questions about the viability of the entire streaming marketplace.

Ultimately, Netflix needs more revenue, and ads are one way to achieve that.

Up next

JPMorgan Chase, Wells Fargo, Citigroup and Morgan Stanley 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.

Coming next week:

▸ The National Association of Realtors reports existing home sales for September.

▸ Third quarter earnings from Bank of America, Goldman Sachs, Johnson & Johnson, United Airlines, American Airlines, Tesla, AT&T, Verizon and Netflix.

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