Inflation reading stokes expectations Fed will remain aggressive in hiking interest rates
The Dow Jones Industrial Average closed nearly 1,300 points lower Tuesday as technology stocks led the market to its worst day since June 11 2020, following an unexpected uptick in August consumer-price inflation.
What happened
- The Dow Jones Industrial Average DJIA, -3.94% dropped 1,276.37 points, or 3.9%, to end at 31,104.97.
- The S&P 500 SPX, -4.32% shed 177.72 points, or 4.3%, ending at 3,932.69.
- The Nasdaq Composite COMP, -5.16% tumbled 632.84 points, or 5.2%, to close at 11,633.57.
- That was the biggest daily percentage fall for all three indexes since June 11, 2020, according to Dow Jones Market Data.
Popular index-tracking exchange-traded funds, including the SPDR S&P 500 ETF Trust SPY, -4.35% and the SPDR Dow Jones Industrial Average Trust ETF DIA, -3.96% fell 4% or more. The tech-concentrated Nasdaq-100 NDX, -5.54% and the Invesco QQQ Trust ETF QQQ, -5.48% both shed 5.5%.
What drove markets
All 11 S&P 500 sectors finished in the red after the August consumer-price index, or CPI, rose 0.1% in August. Though the year-over-year rate slowed to 8.3% from 8.5% in July, economists had been looking for a monthly fall of 0.1% that would bring the year-over-year rate down to 8%.
Meanwhile, the core rate, which strips out volatile food and energy prices, rose 0.6%, for a year-over-year rise of 6.3%, outstripping expectations for a 0.3% monthly rise and a 6% year-over-year pace.
That stoked fears that inflation may be stickier than economists had expected — which in turn might force the Federal Reserve to maintain its aggressive tightening of monetary policy for longer, or at least preclude a pivot back to lower interest rates.
As stocks spiraled lower, losses accelerating in the final hour of trade, causing volatility to surge, with the Cboe Volatility Index, otherwise known as “the VIX,” VIX, +14.24% rising more than 16% to 27.79.
“Markets were jolted by a nasty CPI print this morning and are responding in kind”, said Cliff Hodge, Chief Investment Officer for Cornerstone Wealth in Charlotte, North Carolina. “Misses on both headline and core are disappointing as this bout of inflation proves to be anything but ‘transitory.’ Unfortunately for markets this print will reinforce the need for the Fed to remain aggressive and will likely keep a lid on risk assets over the foreseeable future.”
The data is seen cementing expectations the Federal Reserve will boost the fed-funds rate by another outsize 75 basis points when it meets next week, with fed-funds futures penciling in roughly 40% odds of a 100 basis-point hike.
The yield on the policy-sensitive 2-year note BX:TMUBMUSD02Y surged 18.3 basis points to 3.754%, touching its highest level in nearly 15 years, and further inverting the yield curve — a phenomenon seen as a reliable recession indicator.
“Today’s inflation print is not the data the Fed wanted to see the week before they make a significant decision on the policy rate,” said Charlie Ripley, senior investment strategist for Allianz Investment Management in Minneapolis. “With core inflation rising twice as fast as economist’s expectations and the annualized inflation rate, stripping out food and energy, rising to 6.3%, the Fed clearly has their work cut out for them.”
“Overall, inflation readings remain unacceptably high for policy makers. Coupled with a labor market that is still strong, the data seal the deal for another aggressive, 75-basis point, rate hike next week,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics, in a note.
As stocks tumbled, the U.S. dollar strengthened as investors sought shelter in the safety of the greenback, while higher yields also made the buck more attractive. The ICE U.S. Dollar Index DXY, -0.07%, a gauge of the greenback’s strength compared with a basket of its main rivals, rose 1.4% to 109.88, close to the highest level in two decades.
Companies in focus
- Megacap tech stocks and consumer-discretionary stalwarts helped to lead Tuesday’s selloff. Apple Inc. AAPL, -5.87%, Microsoft Corp. MSFT, -5.50%, Amazon.com Inc. AMZN, -7.06%, Alphabet Inc. GOOGL, -5.90% and Tesla Inc. TSLA, -4.04% all fell 4% or more with Meta down 9.4% and Amazon down 7.1%.
- The so-called unprofitable tech names like those held in the ARK Innovation exchange-traded fund ARKK, -6.79% were among the worst performers on Tuesday. The ARK ETF shed 6.8%.
- Oracle Corp. ORCL, -1.35% late Monday reported lower earnings than expected late Monday and executives’ profit forecast also came in lower than analysts were projecting, as a strengthening dollar took its toll. Shares finished 1.4% lower.
- Peloton Interactive Inc. PTON, -10.32% said late Monday that it has accepted the resignations of co-founders John Foley and Hisao Kushi, the latest leadership shake-up to hit the troubled interactive fitness company. Shares fell 10.3%.
- Online clothing-rental platform Rent the Runway Inc. RENT, -38.74% on Monday announced plans to slash corporate staff after summer-season demand wobbled. Shares dropped 38.7%.
- Only a handful of S&P 500 companies finished Tuesday in the green, including Twitter Inc. and four materials stocks that focus on fertilizer: Albermarle Corp. ALB, +0.38%, Corteva Inc. CTVA, +0.87%,
CF Industries Holdings Inc. CF, +0.67% and Mosaic Company MOS, +0.32%. All 11 S&P 500 sectors were trading in the red.