US stocks resumed their slide on Wednesday after unexpectedly hot “core” inflation data raised expectations for aggressive policy tightening, pushing the tech-heavy Nasdaq Composite down nearly 30 per cent from its record high.
Growth stocks that are seen as particularly sensitive to rising rates led the declines, with the Nasdaq falling 3.2 per cent. The blue-chip S&P 500, which had rallied as much as 1.2 per cent earlier in the trading session, ended the day 1.6 per cent lower.
Consumer prices in the world’s largest economy rose at an annual rate of 8.3 per cent in April, down from 8.5 per cent in March but remaining at a historically elevated level. The figure surpassed economists’ expectations for a cool-down to 8.1 per cent. The month-on-month change in core inflation — which excludes food and energy prices and is closely watched by economists — also exceeded forecasts at 0.6 per cent.
Rising costs of new cars, food, airline fares and housing were the biggest drivers of the increase in consumer prices, the US labour department said.
“The report should be of concern for the Fed given price gains in the core segment appear to be spreading,” TD Securities said in a note to clients.
As consumer prices have surged, traders expect the Fed to raise interest rates aggressively for the rest of this year, which has placed short-term US government debt under pressure.
The yield on the two-year Treasury note, which is particularly sensitive to monetary policy, rose 0.03 percentage points to 2.64 per cent, from below 0.2 per cent a year ago. Yields rise when prices fall.
In contrast, the 10-year Treasury yield, which is driven by longer-term economic trends, shed 0.06 percentage points to 2.93 per cent.
“Today’s report will strengthen the Fed’s resolve to tighten aggressively at its coming meetings, crystallising expectations of [half percentage point] hikes in June and July,” said Silvia Dall’Angelo, senior economist at Federated Hermes.
Futures markets indicate investors expect the Fed’s main interest rate, currently set at between 0.75 per cent and 1 per cent, to reach 2.75 per cent by the end of this year. Investors strengthened their bets on the pace of rate rises after Wednesday’s inflation data, though the expected end-of- year rate remained slightly below the peak hit last week.
European stocks and US equity futures had rallied before the inflation report as investors assumed that price rises would show more signs of peaking as higher energy costs, driven by Russia’s invasion of Ukraine, depressed consumer spending.
“There was a sense that people were cutting back on spending in order to fill up their gas tanks and heat their homes,” said Brian Nick, chief investment strategist at Nuveen. “That clearly wasn’t the case last month.”
Investors and analysts on Wednesday cautioned that even if inflation had now peaked, it could remain elevated for some time, pushing central banks to continue raising borrowing costs. The Fed, which raised its main interest rate by 0.5 percentage points last week and signalled more hikes to come, targets an average inflation rate of 2 per cent over time.
“It is not just about inflation peaking, but also the trajectory going forward,” said Aneeka Gupta, research director at exchange traded fund provider WisdomTree. “We believe it is going to be a long, drawn-out process back to levels where central banks are comfortable.”
Elsewhere in markets, Europe’s Stoxx 600 share index rose 1.7 per cent. Brent crude, the international oil marker, climbed 4.9 per cent to $107.51 a barrel.