US stocks continued their slide on Wednesday after hotter-than-expected “core” inflation data sparked expectations of aggressive policy tightening and pushed the tech-heavy Nasdaq Composite down nearly 30 percent from its record high.
Growth stocks, considered particularly sensitive to rising interest rates, led the declines, with the Nasdaq falling 3.2 percent. The blue-chip S&P 500, which had recovered up to 1.2 percent at the start of the trading session, ended the day 1.6 percent lower.
Consumer prices in the world’s largest economy rose at an annual rate of 8.3 percent in April, up from 8.5 percent in March, but remained at historically high levels. The number beat economists’ expectations for a slowdown to 8.1 percent. The monthly change in core inflation – which excludes food and energy prices and is closely watched by economists – also beat forecasts at 0.6 percent.
Rising costs for new cars, groceries, airfare and housing are the biggest drivers of consumer price increases, the US Department of Labor said.
“The report should be cause for concern for the Fed as core segment gains appear to be spreading,” TD Securities said in a note to clients.
With consumer prices soaring, traders expect the Fed to aggressively raise interest rates for the remainder of this year, which has put short-dated US Treasuries under pressure.
The yield on the two-year Treasury note, which is particularly sensitive to monetary policy, rose 0.03 percentage point to 2.64 percent, from under 0.2 percent a year ago. Yields rise when prices fall.
In contrast, the 10-year Treasury yield, which is driven by longer-term economic trends, fell 0.06 percentage points to 2.93 percent.
“Today’s report will bolster the Fed’s resolve to tighten aggressively at its upcoming meetings and solidify expectations of [half percentage point] Hikes in June and July,” said Silvia Dall’Angelo, Senior Economist at Federated Hermes.
Futures markets are suggesting that investors expect the Fed’s interest rate, currently between 0.75 percent and 1 percent, to hit 2.75 percent by the end of this year. After Wednesday’s inflation data, investors increased their bets on the pace of rate hikes, although the expected year-end rate remained slightly below last week’s peak.
European stocks and US stock futures had rallied ahead of the inflation report as investors expected price hikes to show more signs of a peak as higher energy costs, fueled by Russia’s invasion of Ukraine, weighed on consumer spending.
“There was a sense that people were cutting back on spending to fill up their gas tanks and heat their homes,” said Brian Nick, Nuveen’s chief investment strategist. “That was clearly not the case last month.”
Investors and analysts warned on Wednesday that even if inflation has peaked now, it could remain high for some time, urging central banks to continue raising borrowing costs. The Fed, which raised interest rates by 0.5 percentage points last week and announced further hikes, is targeting an average inflation rate of 2 percent over time.
“It’s not just about peaking inflation, it’s about moving forward,” said Aneeka Gupta, research director at exchange-traded fund provider WisdomTree. “We think it’s going to be a long, drawn out process back to levels where central banks are comfortable.”
Elsewhere, the Stoxx 600 stock index in Europe rose 1.7 percent. Brent crude, the international oil marker, rose 4.9 percent to $107.51 a barrel.
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