Stocks pounded by price growth data
The stock market on Tuesday fell the most since June 2020 after Wall Street’s humbling realization that inflation is not slowing as much as hoped.
The Dow Jones industrial average lost 1,276.37 points, or 3.9%, and closed at 31,104.97. The Standard & Poor’s 500 sank 177.72 points, or 4.3%, to 3,932.69. And the Nasdaq composite index fell 632.84 points, or 5.2%, to 11,633.57.
A hotter-than-expected report on inflation Tuesday had traders bracing for the Federal Reserve to ultimately raise interest rates even higher than expected, with all the risks for the economy that entails.
Bond prices also tumbled, sending yields sharply higher, after the government reported that inflation decelerated last month by less than economists forecast. The drop didn’t quite erase the market’s gains over the last four days.
Fears about higher rates sent prices dropping for gold, cryptocurrencies, crude oil and more.
“Right now, it’s not the journey that’s a worry so much as the destination,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments. “If the Fed wants to hike and hold, the big question is at what level.”
Most of Wall Street came into the day thinking the Fed would raise its key shortterm rate by a hefty threequarters of a percentage point at its meeting next week. But the hope was that inflation was in the midst of quickly falling back to more normal levels after peaking in June at 9.1%.
The thinking was that such a slowdown would let the Fed downshift the size of its rate increases through the end of this year and then potentially hold steady through early 2023.
Tuesday’s report dashed some of those hopes. Many of the data points within it were worse than economists expected, including some the Fed pays particular attention to, such as inflation excluding food and energy prices.
Markets homed in on a 0.6% rise in such prices during August from July, double what economists expected, said Gargi Chaudhuri, head of investment strategy at IShares.
The inflation figures were so much worse than expected that traders now see a 1 in 5 chance for a rate increase of a full percentage point by the Fed next week.
Traders now see a better than 60% likelihood the Fed will pull its federal funds rate all the way up to a range of 4.25% to 4.50% by March. A day earlier, they saw less than a 17% chance of such a high rate, according to CME Group. The Fed has already raised its benchmark interest rate four times this year, to a range of 2.25% to 2.50%.
The hope is that the Fed can slow the economy enough to snuff out high inflation but not so much that it creates a painful recession.
Tuesday’s data put hopes for such a “soft landing” under more threat. In the meantime, higher rates also push down on prices for stocks, bonds and other investments.
Investments seen as the most expensive or the riskiest are the ones hardest hit by higher rates. Bitcoin tumbled 9.4%.
All but six stocks in the S&P 500 fell. Technology and other high-growth companies fell more than the rest of the market because they’re seen as most at risk from higher rates. Apple, Microsoft and Amazon all fell more than 5%.
Treasury yields leaped immediately on expectations for a more aggressive Fed. The yield on the twoyear Treasury, which tends to track expectations for Fed actions, soared to 3.74% from 3.57% late Monday. The 10year yield, which influences rates for mortgages and other loans, rose to 3.42% from 3.36%.