Stocks are tumbling Tuesday as Wall Street comes to the realization that inflation isn’t slowing as much as it had hoped.
The S&P 500 sank 2.1% in early trading, after rising for four straight days. Bond prices also fell sharply, sending their yields higher, after a report showed inflation came in at 8.3% in August, instead of the 8.1% economists expected.
The hotter-than-expected reading likely means the Federal Reserve will ultimately have to raise rates higher to combat inflation, with all the risks for the economy that entails. The yield on the 10-year Treasury rose to 3.44%. Stock markets in Europe swung from gains to losses after the report.
The Labor Department reported Tuesday that sharply lower prices for gas and cheaper used cars slowed U.S. inflation in August for a second straight month, but prices for food surged.
“The Fed was already in a hawkish mood and this data release will do nothing to deter that,” said Paul Ashworth, chief U.S. economist for Capital Economics.
Markets in Europe also reversed course at midday after the U.S. inflation data was released, with the FTSE 100 in London and the DAX in Frankfurt both losing 0.3% and the CAC 40 in Paris down 0.2%.
In Asia, the Shanghai Composite Index gained less than 0.1% to 3,263.79 and the Nikkei 225 in Tokyo added 0.3% to 28,614.63. The Hang Seng in Hong Kong shed 0.2% to 19,326.86.
The Kospi in Seoul soared 2.7% to 2,449.54 and Sydney's S&P-ASX 200 rose 0.7% to 7,009.70.
India's Sensex gained 0.8% to 60,620.01. New Zealand declined while Southeast Asian markets gained.
Fed officials have affirmed support for substantial rate hikes and to keep borrowing costs elevated for long enough to make sure inflation is extinguished.
Consumer prices surged 8.3% in August compared with a year earlier, the government said Tuesday. Though still painfully high, that was down from an 8.5% jump in July and a four-decade high of 9.1% in June. On a monthly basis, prices rose 0.1%, after a flat reading in July.
Excluding the volatile food and energy categories, so-called core prices jumped 0.6% from July to August, higher than many economists had expected and a sign of inflation’s persistence.
Investors had hoped receding inflation pressures might prompt the Fed to back off. Similar hopes earlier were dashed when chair Jerome Powell said in August rates would stay high.
Surveys show traders expect the Fed to raise rates this month for the fifth time this year and by 0.75 percentage points, three times its usual margin. After that, the U.S. central bank is expected to hold rates steady through the first half of 2023.
In energy markets, benchmark U.S. crude fell 41 cents to $87.37 per barrel in electronic trading on the New York Mercantile Exchange. The contract rose 99 cents to $87.78 on Monday. Brent crude, the price basis for international oil trading, lost 50 cents to $93.50 per barrel in London. It gained $1.16 the previous session to $94.
The dollar rose to 144.19 yen from Monday's 142.73 yen. The euro slid back to $1.0052 from $1.0117.
On Monday, the S&P 500 index rose 1.1%. The Dow gained 0.7% and the Nasdaq composite rallied 1.3%.
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