Shares fall after bad inflation, rate hike expected

NEW YORK (AP) – Stocks fell sharply on Friday after Wall Street’s cold realization that inflation last month got worse, not better, as investors were hoping.

The S&P 500 was down 2.9 percent in afternoon trading and was rising in its ninth week of declines in the past 10, as Treasury yields hit their highest levels in years. The Dow Jones Industrial Average was down 830 points, or 2.6 percent, at 31,442 as of 1:15 p.m. Eastern Time, and the Nasdaq Composite was down 3.5 percent.

Wall Street came on Friday in the hope that a much-anticipated report would show that inflation, the worst in generations, slowed a touch last month and reached its peak. Instead, the US government said inflation rose to 8.6 percent in May from 8.3 percent a month earlier.

The Federal Reserve has already started raising interest rates and taking other steps to slow the economy, hoping to tame inflation. Friday’s reading by Wall Street meant the Fed would remain firmly on the brakes for the economy, with hopes that it could ease later this year.

“Inflation is hot, hot, hot,” said Brian Jacobsen, senior investment strategist at AllSpring Global Investments. “Basically, everything was up.”

watch: Americans struggle with high cost of living amid record inflation

There are growing hopes for the Fed to raise its key short-term interest rate by half a percentage point in each of its next three meetings, starting next week. The third in September had been the subject of debate among investors in recent weeks. Only once since 2000 has the Fed raised rates so much last month.

“There doesn’t seem to be any relief, but a lot can change between now and September,” Jacobsen said. “No one knows what the Fed will do in a few months, including the Fed.”

The country’s high inflation, as well as an aggressive Fed’s expectations, have sent the two-year Treasury yield to its highest level since 2008 and the S&P 500 down 18.6 percent from its record set in early January. The worst pain came from high-growth technology stocks, cryptocurrencies, and others, especially the big winners in the early days of the pandemic. But losses are mounting as retailers and others are warning about upcoming profits.

A stock’s price rises and falls on two things, essentially: how much cash a company produces and how much an investor is willing to pay for it. The Fed’s moves on interest rates pretty much affect that second part.

From the start of the pandemic, record-low interest rates engineered by the Fed and other central banks helped keep investment prices high. Now the “easy mode” for investors is suddenly and forcefully shutting down.

Not only that, an overly aggressive rate hike by the Fed could eventually force the economy into recession. Higher interest rates make borrowing more expensive, which puts pressure on spending and investments by households and companies.

One of the fears among investors is that food and fuel costs could continue to rise, regardless of how aggressively the Fed moves.

“The fact remains that the Fed has little ability to control food prices,” Rick Ridder, BlackRock’s chief investment officer for global fixed income, said in a statement. He instead pointed to supply and demand mismatch, high costs for energy and wages, and the crisis in Ukraine, a major breadbasket for the world.

This increases the risk that central banks will apply excessive brakes on the economy as they push against a string “and inevitably fall into a damaging policy mistake,” Ryder said.

The economy has already shown some mixed signs, and a report on Friday indicated consumer sentiment is getting worse than economists expected. Much of the souring in a preliminary study by the University of Michigan was due to higher gasoline prices.

This adds to a number of recent profit warnings from retailers indicating that US shoppers are slowing down or at least changing their spending due to inflation. This kind of spending is the heart of the American economy.

The two-year Treasury yield rose to 3.02 percent after an inflation report from 2.83 percent late Thursday, a big move for the bond market. During the day, it touched its highest level since the presidency of George W. Bush, according to Tradeweb data.

The 10-year yield was also up, but not as dramatically as the two-year yield, which is more influenced by expectations of Fed movements. The 10-year yield rose to 3.15 per cent from 3.04 per cent and touched its highest level since 2018.

News wrap: Treasury Secretary Janet Yellen says inflation will remain high

The difference between those two yields is a sign that investors in the bond market are more concerned about economic growth. Typically, the wider the gap, the higher the 10-year yields because they require investors to hold their dollars longer.

A jump above the 10-year yield for the two-year yield would be a sign to some investors that a recession may be on the way in a year or two.

“The market is somewhat of this no-man’s land, where you don’t really have a good sure sign that says get creative and buy the market, but you don’t have concrete information about a bearish move that’s in order.” More likely to be more defensive,” said Jason Pride, chief investment officer for Private Wealth at Glenmead.

Friday’s losses were broader for the S&P 500, with more than 90 percent of the shares in the index falling.

Big Tech stocks were some of the heaviest weights amid widespread losses for the biggest winners of the pre-ultralow-rate era. Apple fell 3.4 percent, Amazon fell 5.6 percent and Nvidia fell 5.2 percent.

Companies that rely on strong spending from consumers were also particularly vulnerable after a reading on consumer sentiment. Caesars Entertainment fell 9.6 percent, and cruise operator Royal Caribbean fell 7.2 percent.

Stocks in Europe fell for a second day after the European Central Bank raised interest rates for the first time in more than a decade to combat inflation.

AP Business Writer Elaine Kurtenbach contributed.


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