Wall Street's selloff sent stocks lower Wednesday, raising concerns that what appeared to be a blip in the fight to rein in inflation was turning into a troubling trend.
The S&P 500 fell 0.9%, with most of the index's constituents declining. The Dow Jones Industrial Average fell 422 points, or 1.1%, and the Nasdaq Composite Index fell 0.8%.
Bond markets also saw U.S. Treasury yields soar after reports that inflation last month was higher than economists had expected, putting pressure on stocks. This is the third consecutive report suggesting that progress towards curbing high inflation may be stalling. This hurts hopes that the disappointing inflation numbers for January and February were, for some technical reason, not as bad as they seemed.
“There are still embers of inflation in many parts of the economy,” said Joe Davis, Vanguard's chief global economist.
That's a pain for shoppers, as in-store prices could be even higher. For Wall Street, there are growing concerns that the Federal Reserve will hold off on delivering the interest rate cuts that traders are desperately hoping and betting on.
The S&P 500 index is already up more than 20% since Halloween, driven in part by expectations that the Federal Reserve will cut key interest rates, which are at their highest level in more than 20 years. These cuts would ease pressure on the economy and encourage investors to pay higher prices for stocks, bonds, cryptocurrencies and other investments.
But the Fed is waiting for further evidence that inflation is falling sustainably toward its 2% goal. Last year saw an encouraging cooling, but now fears are rising that inflation will stagnate after higher-than-expected inflation reports and broader economic indicators in January, February and March. There is.
“Two data points don't form a trend, but three probably do,” said Brian Jacobsen, chief economist at Annex Wealth Management.
“If we get another reading like this, the conversation at the Fed will shift from when to cut rates to whether to raise rates.”
Immediately after the inflation statistics were released in the morning, prices of bonds and gold fell.
The yield on the 10-year U.S. Treasury rose to 4.54% from 4.36% late Tuesday, back to November levels. The two-year Treasury yield, driven largely by expectations of Fed action, rose further, rising from 4.74% to 4.97%.
Traders have sharply reduced their expectations that the Fed could start cutting interest rates in June. That chance now stands at just 17%, down from nearly 74% a month ago, according to CME Group's FedWatch tool.
Perhaps more importantly, traders have shifted their bets further toward a Fed rate cut only twice this year. At the beginning of the year, it was predicted that more than six locations would be cut by 2024.
High interest rates slow the economy and reduce inflation by lowering investment prices. The fear is that if interest rates remain too high for too long, they could trigger a recession.
Wall Street's biggest losers on Wednesday included real estate investment trusts and utility companies, whose stock prices tend to be most hurt by high interest rates.
Real estate stocks in the S&P 500 index fell 4.1%, the biggest decline among the 11 sectors that make up the index. Among them, office owner Boston Properties fell 6.1% and Alexandria Real Estate Equities fell 5.3%.
Home builders also slumped, as rising interest rates could push up mortgage prices and dampen the housing industry. DR Horton fell 6.4%, Lennar fell 5.8% and Palto Group fell 5.2%.
Overall, the S&P 500 fell 49.27 points to 5,160.64. The Dow Jones Industrial Average fell 422.16 points to 38,461.51 points, and the Nasdaq Composite Index fell 136.28 points to 16,170.36 points.
Critics were already saying that the U.S. stock market looked expensive by many measures. They said interest rates needed to be lowered or corporate profits restored to make stock prices look more reasonable. Wall Street's hope is that a resilient U.S. economy could support profits, even if hopes for interest rate cuts fade.
As major U.S. companies line up on the runway to announce how much profit they made in the first three months of the year, Delta Air Lines helped kick off the reporting season by posting better-than-expected results. .
The company said there is strong demand for air travel around the world and that it expects this strength to continue into the spring. However, the company refrained from raising its full-year profit forecast. The company's stock rose as much as 4% in the morning, but then fell 2.3%.
The banking industry will soon be in the spotlight with earnings season, with JPMorgan Chase and Wells Fargo among those to be announced Friday.
In overseas stock markets, indexes were mixed across much of Europe. In Asia, stocks rose 1.9% in Hong Kong but fell 0.7% in Shanghai after Fitch Ratings downgraded China's fiscal outlook.
Cho writes for The Associated Press. Associated Press writers Matt Ott and Elaine Kurtenbach contributed to this report.
