U.S. stocks ended sharply lower Thursday as investors digested another hot inflation report that showed price pressures at the wholesale level rose more than expected in January,
Further fanning worries the Federal Reserve may raise interest rates faster and further than investors have been expecting, a pair of regional Fed bank presidents argued that a larger, half-point rise would have been justified when policy makers met earlier this month.
How stock indexes traded
- The Dow Jones Industrial Average DJIA, -1.26% fell 431.20 points, or 1.3%, to close at 33,696.85.
- The S&P 500 SPX, -1.38% dropped 57.19 points, or 1.4%, to end at 4,090.41.
- The Nasdaq Composite COMP, -1.78% finished at 11,855.83, down 189.86 points, or 1.8%.
The Nasdaq and S&P 500 remain higher for the week, while the Dow was on track for a 0.5% weekly decline.
What drove markets
After the January consumer-price index showed only slow progress in bringing inflation down, data released Thursday morning showed inflation at the wholesale level also rebounded in January. U.S. wholesale prices jumped 0.7% to start the new year, the biggest gain since last summer, offering further proof that inflation is sticky and unlikely to decline rapidly.
A separate measure of wholesale prices that strips out volatile food and energy costs climbed a sharp 0.6% last month, the largest increase in 10 months.
“Today’s wholesale inflation data, when coupled with the CPI report, suggests that the easy battles against price pressures have been won. We believe the move from 9% to 6% [inflation level] will prove to be much less challenging than the journey from 6% to 3%,” wrote John Lynch, chief investment officer at Comerica Wealth Management, in emailed comments.
Lynch said the stickier-than-expected inflation means the Federal Reserve is likely to remain steadfast in its fight against inflation, with tighter policy, and for longer, than equity markets have been pricing in since October.
The stronger-than-expected wholesale inflation reading dented U.S. stock indexes and sent Treasury yields TMUBMUSD10Y, 3.884% higher.
Early weakness was also blamed on remarks by Cleveland Fed President Loretta Mester, who said she had seen a “compelling” case for a half-point interest rate hike at the Fed’s Jan. 31-Feb. 1 meeting, when policy makers lifted the fed-funds rate by a quarter of a percentage point.
Stocks sank to fresh session lows after St. Louis Fed President James Bullard told reporters after a speech in Tennessee that he had joined Mester in urging a half-point hike at the earlier meeting and saw the case for moving rates up quickly. Neither Bullard nor Mester are voting members of the rate-setting Federal Open Market Committee this year.
Mester’s “reiteration that they need to bring rates above 5% and hold for some time is becoming the consensus view and should suggest the dot plots in March will be much higher,” said Edward Moya, senior market analyst at Oanda.
In recent sessions traders have absorbed data showing U.S. inflation being stubbornly sticky and retail sales remaining strong. These follow a surprisingly strong jobs report at the start of the month. Fed-funds futures traders have largely closed a gap between the market and the Fed over the path of rate hikes and now see a better-than-50% chance that expected 25 basis point increases in March and May will be followed by another 25 basis point rise in June.
“Considering these pricing developments with pressure on profit margins and interest rates, investors should prepare for a retest of the October lows,” said Comerica’s Lynch.
Benchmark U.S. Treasury yields TMUBMUSD10Y, 3.884% are near their highest for 2023, yet the S&P 500 index sits just shy of its best level since August, having bounced 6.5% for the year to date.
In other economic data, construction on new U.S. homes fell a seasonally adjusted 4.5% in January to 1.31 million, the Commerce Department said Thursday. The drop in construction on homes follows the decline in December, when housing starts also fell by 3.4%.
The number of Americans who applied for unemployment benefits in stayed below 200,000 for the fifth week in a row, signaling the U.S. labor market is still quite strong. New applications slipped from to 194,000 from a revised 195,000 in the prior week, the government said Thursday.
Companies in focus
- Cisco Systems CSCO, +5.24% stock rose 5.2% on Thursday after the networking equipment manufacturer beat expectations for revenue growth in the holiday quarter, and executives predicted stronger growth in a revised annual forecast.
- Roku ROKU, +11.15% shares gained 11.2% after the digital media player manufacturer reported consumers streamed more content than expected through its platform in the fourth quarter, helping to drive a sizable revenue beat despite macroeconomic pressures.
- Paramount Global PARA, -4.24% shares fell 4.2% after the media giant fell a bit shy of revenue expectations for its latest quarter while also recording a loss.
- Shopify SHOP, -15.88% shares dropped 15.9% after the online retailer produced a better holiday quarter than expected according to a Wednesday earnings report, but forecast slowing revenue growth.