Stocks decline as inflation stays hot
A choppy day of trading on Wall Street ended with stocks broadly lower on Friday, after a report showed inflation is slowing less than hoped just days before Federal Reserve officials are expected to raise interest rates again.
The Standard & Poor’s 500 and Nasdaq composite each fell 0.7%, while the Dow Jones industrial average dropped 0.9%. Smaller-company stocks fell even more, pulling the Russell 2000 index 1.2% lower.
The indexes marked their first losing week in the last three.
The U.S. government reported that prices paid at the wholesale level were 7.4% higher in November than a year earlier. That’s a slowdown from October’s wholesale inf lation rate of 8.1%, but it was still slightly worse than economists expected.
“There’s a sense that inflation has plateaued, but, that said, it’s still sticky and the Fed is most likely going to have to push harder,” said Quincy Krosby, chief equity strategist for LPL Financial.
The nation’s high inflation, along with the Federal Reserve’s economy-crunching response to it, have been the main reasons for Wall Street’s painful tumble this year.
Stocks have recovered some of their losses recently, as inflation has slowed since hitting a peak in the summer. But it remains too high, raising the risk the Federal Reserve will have to keep hiking interest rates sharply to get it fully under control.
Treasury yields climbed as traders stepped up bets for how high the Fed will ultimately take interest rates.
A separate report on Friday showed U.S. households are paring expectations a bit for inflation in the future. That’s key for the Fed, which says it wants to prevent a vicious cycle where households rush to make purchases on fears prices will rise further. Such buying activity only fans inflation higher.
Households are forecasting inflation of 4.6% in the year ahead, according to the survey by the University of Michigan. That’s the lowest such reading in 15 months, though still well above where it was two years ago. Expectations for longer-run inflation remain stuck in the 2.9% to 3.1% range, where they’ve been for 16 of the last 17 months, at 3%.
Sentiment among consumers was also stronger than economists expected, according to the University of Michigan’s preliminary reading. That’s good news for the economy, which gets most of its strength from spending by such consumers. But it can also complicate the Fed’s task. If such spending remains resilient, it could keep up the pressure on inflation.
The last big piece of data on inflation before the Fed’s next decision arrives on Tuesday, when economists expect the consumer price index to show that inflation slowed to 7.3% last month from 7.7% in October.
“The two most important questions for next year are how fast inflation will drop and how much will it need to drop for the Fed to stop tightening,” foreign-exchange strategists wrote in a BofA Global Research report. “We are concerned markets are too optimistic on both.”
Roughly 75% of the stocks in the S&P 500 closed lower Friday, with healthcare, technology and energy among the sectors that weighed down the market most. The benchmark index fell 29.13 points to 3,934.38. It finished 3.4% lower for the week and is now down 17.5% this year.
The Dow fell 305.02 points to 33,476.46, while the Nasdaq slid 77.39 points to 11,004.62. The Russell 2000
dropped 21.63 points to 1,796.66.
The yield on the two-year Treasury, which tends to track expectations for Fed action, rose to 4.36% from 4.26% just before Friday’s inflation report was released. It was at 4.31% late Thursday.
The yield on the 10-year Treasury, which helps dictate rates for mortgages and other important kinds of loans, rose to 3.58% from 3.49% late Thursday.