The Dow Jones Industrial Average fell more than 1,300 points in the last hour of trading on Tuesday as losses accelerated on tech stocks as bond yields soared, leaving all three stock indices on track for their worst session since at least June after an unexpected rise in August. consumer price inflation.
What is happening
The Dow Jones Industrial Average DJIA
fell 1,307 points, or 4%, to 31,081.
The S&P 500 SPX
was down 180 points, or 4.4%, at 3,933.
The Nasdaq Composite COMP
fell 630 points, or 5.2%, to 11,638.
Popular exchange-traded index funds, including the SPDR S&P 500 ETF Trust SPY
and the SPDR Dow Jones Industrial Average Trust ETF DIA
are down sharply, in line with their benchmarks. The Nasdaq-100 NDX concentrated in technology
and Invesco QQQ Trust QQQ ETF
were down 4%.
All three indices are on track for their biggest percentage point declines since June 11.
What drives the markets?
The August consumer price index, or CPI, rose 0.1% in August, although the year-on-year rate slowed to 8.3% from 8.5% in July. Economists had expected a monthly decline of 0.1% that would bring the year-over-year rate down to 8%.
However, the base rate, which excludes volatility in food and energy prices, rose 0.6%, up 6.3% year-on-year, beating expectations of a monthly rise of 0.3% and at a rate of 6% year-on-year.
See: US inflation rebounds in August, according to the CPI, despite the fall in gasoline prices
The idea that inflation could be more rigid than economists had expected – which could in turn force the Federal Reserve to maintain its aggressive tightening of monetary policy for longer – was enough to send US stocks falling. as volatility rose, with the Cboe Volatility Index, otherwise known as “VIX”, VIX
rising more than 8% to 25.9 in afternoon trading.
“Markets were rattled by a poor CPI print this morning and are reacting accordingly,” said Cliff Hodge, chief investment officer for Cornerstone Wealth in Charlotte, North Carolina. “The misfires on both the headline and the core are disappointing as this surge in inflation proves to be anything but ‘transient’. Unfortunately for markets, this impression will reinforce the need for the Fed to remain aggressive and likely maintain a cap on risky assets for the foreseeable future.
The data appears to cement expectations that the Federal Reserve will hike the fed funds rate another 75 basis points at its meeting next week, with fed funds futures looming on the outside prospect of a higher 100 basis points. Treasury yields jumped, with the rate on the policy-sensitive 2-year note BX:TMUBMUSD02Y rising more than 19 basis points to trade at 3.758%, near a 15-year high, and reversing further the yield curve – a phenomenon considered a reliable indicator of recession.
“Today’s inflation is not the data the Fed wanted to see the week before they make an important policy rate decision,” said Charlie Ripley, senior investment strategist for Allianz Investment Management in Minneapolis. “With core inflation rising twice as fast as economists expected and the annualized inflation rate, excluding food and energy, hitting 6.3%, the Fed clearly has its work cut out.”
“Overall, the inflation numbers remain unacceptable to policymakers. Coupled with a still strong labor market, the data seals 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.
See: Any lingering doubt that the Fed will go big with the next rate move is now gone
The US dollar also strengthened as investors sought refuge in the safety of the greenback, while higher yields also made the dollar more attractive. The ICE US Dollar Index DXY,
an indicator of the greenback’s strength against a basket of its major rivals, rose 1.4% to 109.83.
Companies in the spotlight
Tech stocks Megacap and consumer discretionary stalwarts helped lead Tuesday’s selloff, while “value” plays as the consumer staples sector outperforms. Apple Inc.
and Tesla Inc.
were all down 4% or more.
So-called unprofitable tech names like those held in the ARK Innovation Listed Index Fund
were among the worst performers on Tuesday. The ARK ETF was down 6.6%.
On Monday evening, earnings fell short of expectations and executives’ earnings forecast also fell short of analysts’ expectations as the strengthening dollar took its toll. Oracle shares edged higher in afternoon trading, erasing earlier losses.
Interactive Peloton Inc.
said Monday night that he had accepted the resignations of co-founders John Foley and Hisao Kushi, the latest management shakeup to hit the struggling interactive fitness company. The shares fell more than 10%.
Online clothing rental platform Rent the track inc.
on Monday announced plans to cut staff at the company after demand for the summer season faltered. The shares fell 32.6%.
Only a handful of S&P 500 companies clung to Tuesday afternoon’s gains, including Twitter Inc. and four stocks of materials: Albermarle Corp.
CF Industries Holdings Inc.
and Mosaic Society
All 11 sectors of the S&P 500 were trading in the red.
—Steve Goldstein contributed to this article.
Hear Ray Dalio at the Best New Ideas in Money Festival on September 21-22 in New York City. The hedge fund pioneer has a strong opinion on the direction the economy is taking.
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