Dow slides 400 points, after inflation climbs to highest in 13 years

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U.S. stock indexes headed sharply lower Wednesday midday, after a reading on inflation for the year to April climbed 4.2%, the highest rate in about 13 years, reigniting fears that the Federal Reserve may need to dial back its easy money policies earlier than expected.

Trading on Wednesday comes after the Dow Jones Industrial Average suffered its biggest one-day fall since late February.

What are major indexes doing?
  • The Dow Jones Industrial Average
    DJIA,
    -1.60%

    was down 424 points, or 1.2%, at around 33,851, falling below its prior session low of 33,957.08.

  • The S&P 500 index
    SPX,
    -1.85%

    was trading 63 points lower, or 1.1%, around 4,087.

  • The Nasdaq Composite Index
    COMP,
    -2.37%

    dropped 297 points, or 2.2%, to about 13,091.

On Tuesday, the Nasdaq Composite bounced back from an intraday fall of more than 2% to end slightly lower as tech shares rebounded from an initial rout. But the broader market struggled to recover, with the Dow finishing 473.66 points lower, 1.4%, for its biggest one-day percentage drop since Feb. 26. The S&P 500 lost 0.9%.

What’s driving the market?

Stocks headed sharply lower as inflation jitters percolated again, following a report showing U.S. inflation in the year to April rose at its fastest pace in about 13 years, amid the recovery from the COVID pandemic.

“Inflation destroys wealth. Period,” said Patrick Leary, head of trading at Incapital, in an interview with MarketWatch. “We see inflation showing up in markets. If it’s indeed transitory, markets can live with it. But if it’s not transitory, that’s when it is going to become troubling for stocks.”

Specifically, the consumer-price index rose 4.2% from a year ago, compared with average economists estimates surveyed by Econoday for a 3.6% increase. The month-over-month rise was 0.8%, versus a forecast for a rise of 0.2%. Overall, the rise was showed the fastest rate of climb since September 2008.

Excluding volatile food and energy prices, the core CPI reading increased 3% from the same period in 2020, compared with expectations for 2.3% for the year.

“While the surge in inflation over the past year was driven in part by base effects, given last year’s economic lockdowns, we are seeing prices rise for all sorts of things, like lumber, auto parts, semiconductors, groceries and gasoline,” wrote Nancy Davis, founder of Quadratic Capital Management and manager of the Quadratic Interest Rate Volatility and Inflation Hedge exchange-traded fund
IVOL,
-0.11%
.

“I expect inflation data to remain elevated over the coming months, given the widespread reopening of the economy, shortages or delays in many manufactured goods and a dovish Federal Reserve that is willing to let inflation run above its 2% target,” she said.

U.S. gasoline
RBM21,
+1.14%

prices also topped $3 a gallon Wednesday for the first time in more than six years on Wednesday, pushing higher as the government and operators of the Colonial Pipeline looked to address fuel bottlenecks sparked by a cyberattack that at least temporarily hamstrung a key artery for fuel transport in the U.S.

Read: What is the Jones Act? And why might waiving it help ease East Coast gas ‘supply crunch’?

Some analysts also said that stock valuations have been elevated and that a pullback in stocks isn’t abnormal.

“The markets have been hovering around all times highs with a lot of the reopening trade already priced in,” wrote Mike Loewengart, managing director, investment strategy at E-Trade Financial, in emailed comments on Wednesday.

“So it’s not out of the question that the outsized inflation read could bring us back down to earth a bit,” the analysts wrote. “Keep in mind the Fed has made it clear that it won’t let inflation increases necessarily sway it from its easy money policies and further any jumps like this could be transitory. So is this a trend? That remains to be seen,” he said.

That said, Fed No. 2 Richard Clarida said that he was “surprised” by the April inflation data. In prepared remarks, however, he said indicated he was more worried about the health of the U.S. labor market than high inflation.

“The near-term outlook for the labor market appears to be more uncertain than the outlook for activity,” Clarida said, in remarks at the start of a discussion of the outlook with the National Association for Business Economics.

Which companies are in focus?
How are other assets faring?
  • The yield on the 10-year U.S. Treasury note TMUBMUSD10Y, was up 6 basis points at 1.68%. Yields and bond prices move in opposite directions.

  • The ICE U.S. Dollar Index DXY, a measure of the currency against a basket of six major rivals, was up 0.8%, jumping after the CPI reading.

  • Oil futures traded higher, with the U.S. benchmark CL00 advancing 1.2% higher at $66.06 a barrel on the New York Mercantile Exchange Gold futures GC00 edged lower, down less than 0.1% at $1,822.70 an ounce.

  • In European equities, the Stoxx Europe 600 SXXP up 0.3% and London’s FTSE 100 UKX picking up 0.8%.

  • Hong Kong’s Hang Seng Index HSI closed 0.8% higher, while the Shanghai Composite SHCOMP climbed 0.6% and Japan’s Nikkei 225 NIK sank 1.6%.

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