U.S. stocks slumped Tuesday after an unexpected monthly rise in the August consumer-price index dashed hopes for a further slowdown in inflation and reinforced expectations Federal Reserve policy makers will continue to aggressively tighten monetary policy.
The Dow Jones Industrial Average
dropped 874 points, or 2.7%, to 31,505.
The S&P 500
was down 124 points, or 3%, at 3,986.
The Nasdaq Composite
tumbled 471 points, or 3.8%, to 11,795.
Popular, index-tracking exchange-traded funds, including the SPDR S&P 500 ETF Trust
and the SPDR Dow Jones Industrial Average Trust ETF
were down sharply in line with their benchmarks. The tech-concentrated Nasdaq-100
and the Invesco QQQ Trust ETF
were down 4%.
The S&P 500 had climbed 5.2% over the last four trading days through Monday.
What’s driving markets
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 looked for a monthly fall of 0.1% that would bring the year-over-year rate down to 8%. However, 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.
But the notion that inflation may be stickier than economists had expected was enough to send U.S. stocks into a tailspin as volatility surged, with the CBOE Volatility Index, otherwise known as “the VIX”, rising more than 7% to 25.6 in afternoon trade.
“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 emailed comments.
“Misses on both headline and core are disappointing as this bout of inflation proves to be anything but ‘transitory.’ Price gains were pervasive, with more than 70% of the CPI basket rising by at least a 4% annualized rate. 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,” Hodge said.
Stubborn inflation pressures will likely force the Fed to “turn up the heat on its tightening campaign, which puts the broader economy at further risk of a material downturn/recession within the next year,” said Jason Pride, chief investment officer of private wealth at Glenmede.
“In recognition of these uncertainties, investors should maintain an underweight risk posture, particularly given the premium valuations still prevalent in equity markets,” he wrote.
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 the outside prospect of a 100 basis point hike. Treasury yields jumped, with the rate on the policy-sensitive 2-year note
surging more 16 basis points to trade at 3.72%, near a 15-year high, and further inverting the yield curve — a phenomenon seen as a reliable recession indicator.
“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.
The U.S. dollar also strengthened, with the ICE U.S. Dollar Index
a gauge of the greenback’s strength compared to a basket of its main rivals, was up 1.2% at 109.63.
Companies in focus
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. Oracle shares turned modestly higher in afternoon trade, erasing earlier losses.
Peloton Interactive Inc.
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 were down more than 10%.
Only a handful of S&P 500 companies were clinging to gains for the day Tuesday afternoon, including Twitter Inc.
Enphase Energy Inc. and four materials stocks: Albermarle Corp.
CF Industries Holdings Inc.
and Mosaic Company
All 11 S&P 500 sectors were trading in the red.
—Steve Goldstein contributed to this article.