New month, same old inflation fears

Most stocks marched lower Wednesday as stubbornly sticky inflation has Wall Street bracing for interest rates to stay higher for longer.

The Standard & Poor’s 500 fell 0.5% in its first trading after coming off a frigid February. The Dow Jones industrial average edged up 5 points, or less than 0.1%, and the Nasdaq composite fell 0.7%.

After a hot start to the year, the stock market has struggled as data piled up to show inflation and the overall economy are remaining more resilient than expected. That led many investors to delay their forecasts for a recession to later in the year, while also raising their expectations for how high the Federal Reserve will take interest rates.

Higher rates can drive down inflation, but they raise the risk of a recession. They also drag down prices for stocks and other investments.

Wall Street received another reminder of inflation’s stubbornness from the latest report to show that U.S. manufacturing is weakening. A report from the Institute for Supply Management said a measure of prices paid rose in February and hit its highest level since September.

“The biggest risk to markets is an economy that stagnates yet continues to struggle with nagging inflation pressures,” Jeffrey Roach, chief economist for LPL Financial, said in a note to investors.

The market’s expectations have firmed for the Fed to stay aggressive to ensure inflation falls toward its 2% goal. Traders have pulled back bets that the central bank could cut rates later this year, and some have increased bets it may reaccelerate the pace of its hikes later this month.

The widespread expectation is now for the Fed to take its key overnight rate to at least 5.25% by June. Some bets are also calling for the rate to top 5.50%, its highest level since 2001. The rate is currently in a range of 4.50% to 4.75% after starting last year at basically zero.

Treasury yields rose immediately after the release of the manufacturing data. They had shot higher in February as expectations rose for the Fed and rates.

Several big-name retailers have already offered discouraging forecasts for the upcoming year given the challenges U.S. households are facing because of high inflation and other factors.

Kohl’s fell 1.9% after it joined them. It also said it swung to a surprise loss for the three months through Jan. 28.

Ross Stores edged up 0.1% after spending most of the day lower despite reporting better profit and revenue for the latest quarter than expected. It gave a forecast for profit this upcoming year that fell short of Wall Street’s expectations.

Its chief executive, Barbara Rentler, said the company wanted to be conservative given so much uncertainty about the economy and world. She said high inflation is continuing to hit low- to moderate-income customers.

Vaccine company Novavax tumbled 25.9% after it warned there’s “substantial doubt” about its ability to stay in business over the next year. It reported a net loss of $657.9 million for the last year.

Home improvement giant Lowe’s fell 5.6% for one of the largest losses in the S&P 500 after it reported weaker revenue for the latest quarter than expected.

On the winning side was First Solar, which jumped 15.7% after it reported stronger results for the latest quarter than expected and continued bookings.

All told, the S&P 500 fell 18.76 points to 3,951.39. The Dow rose 5.14 points to 32,661.84, and the Nasdaq slid 76.06 points to 11,379.48.

Stock markets overseas were stronger after some encouraging data on the world’s second-largest economy.

Hong Kong’s Hang Seng index jumped 4.2% and stocks in Shanghai gained 1% after reports on manufacturing in China showed a strong recovery after antivirus controls were lifted late last year. That followed a slump in activity that dragged last year’s economic growth to 3%, China’s second-lowest level since at least the 1970s.

In the bond market, the yield on the 10-year U.S. Treasury rose to 3.99% from 3.93% late Tuesday. It helps set rates for mortgages and other loans that shape the economy, and it’s near its highest level since November after topping 4% earlier in the day.

The two-year yield, which moves more on expectations for the Fed, rose to 4.89% from 4.82%.