NEW YORK — The chilling realization on Wall Street that inflation got worse last month, not better as hoped, sent markets tumbling on Friday.
Them&P 500 fell 2.9% to lock in its ninth losing week in the past 10 years, and falling bond prices sent Treasury yields to their highest levels in years. The Dow Jones Industrial Average lost 2.7% and the Nasdaq composite fell 3.5%.
Wall Street entered Friday on hopes that a much-anticipated report would show that the worst inflation in generations has slowed a bit in the past month and is past its peak. Instead, the US government said inflation accelerated to 8.6% in May from 8.3% a month earlier.
The Federal Reserve has already begun raising interest rates and taking other steps to slow the economy, hoping to bring inflation down. Wall Street took Friday’s reading to mean the Fed’s foot will remain firmly on the brakes on the economy, dashing hopes it could ease later this year.
“Inflation is hot, hot, hot,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments. “Basically, everything was in place.”
The Fed is increasingly expected to raise its main short-term interest rate by half a percentage point at each of its next three meetings, starting next week. This third in September had been the subject of debate among investors in recent weeks. Only once since 2000 has the Fed raised its rates by as much, last month.
“There’s no relief in sight, but a lot can change by September,” Jacobsen said. “Nobody knows what the Fed will do in a few months, including the Fed.”
The country’s high inflation, along with expectations of an aggressive Fed, sent the two-year Treasury yield to its highest level since 2008 and the S&P 500 down 18.7% from its record high set in early January. The worst pain has been in high-growth tech stocks, cryptocurrencies and other particularly big gainers from the early days of the pandemic. But the damage is widening as retailers and others warn of profits to come.
Them&P 500 fell 116.96 points to 3,900.86. Combined with its losses on Thursday, when investors rushed to lock in final trades ahead of the inflation report, it was the worst two-day stretch for Wall Street’s benchmark in nearly two years. .
The Dow lost 880.00 points to 31,392.79 and the Nasdaq fell 414.20 to 11,340.02.
Stock prices basically go up and down based on two things: how much cash a company produces and how much an investor is willing to pay for it. The movements of the Fed on interest rates strongly influence this second part.
Since the start of the pandemic, historically low interest rates put in place by the Fed and other central banks have helped keep investment prices high. Now, “easy mode” for investors is abruptly and forcefully disabled.
In addition, overly aggressive rate hikes by the Fed could ultimately push the economy into a recession. Higher interest rates make borrowing more expensive, which weighs on household and business spending and investment.
One of the fears investors have is that food and fuel prices will continue to rise no matter how aggressive the Fed is.
“The fact is the Fed has very little ability to control food prices,” Rick Rieder, BlackRock’s chief investment officer for global fixed income, said in a statement. Instead, he pointed to the mismatches between supply and demand, rising energy and wage costs, and the crisis in Ukraine, which is a major breadbasket for the world.
This increases the threat of central banks overtightening the brakes on the economy, as they push against a rope “and essentially fall into a damaging policy error,” Rieder said.
The economy has already shown mixed signals, and a report on Friday said consumer sentiment is deteriorating more than economists expected. Much of the sourness in the preliminary reading from the University of Michigan was due to rising gasoline prices.
This comes on top of several recent retail earnings warnings that US shoppers are slowing or at least adjusting their spending due to inflation. These expenses are at the heart of the American economy.
The two-year Treasury yield climbed to 3.05% after inflation reported 2.83% on Thursday night, a big move for the bond market. During the day, it hit its highest level since the presidency of George W. Bush, according to data from Tradeweb.
The 10-year yield also rose, but not as sharply as the two-year yield, which is influenced more by expectations about Fed moves. The 10-year yield fell from 3.04% to 3.15% and touched its highest level since 2018.
The narrowing of the spread between these two yields is a signal that bond market investors are more concerned about economic growth. Usually the spread is wide, with 10-year yields higher because they force investors to hold onto their dollars longer.
A two-year return higher than the 10-year return would be a signal to some investors that a recession could hit in a year or two.
“This market is to some degree in this no man’s land, where you don’t have a very good, definite signal that says to get constructive and buy the market, but you don’t have solid information about a recession. more likely in order to become more defensive,” said Jason Pride, director of private wealth investments at Glenmede.
Friday’s losses were widespread for the S&P 500, with more than 90% of stocks in the index down.
Big Tech shares were among the heaviest weights amid wide losses to the biggest gainers of the previous era of ultra-low rates. Microsoft fell 4.5%, Amazon 5.6% and Nvidia 6%.
Companies that depend on strong consumer spending were also particularly weak following the reading on consumer sentiment. Caesars Entertainment fell 9.3% and cruise line Royal Caribbean fell 7.3%.
Stocks fell in Europe for the second day after the European Central Bank said it would raise interest rates for the first time in more than a decade to fight inflation.
AP Business Writer Elaine Kurtenbach contributed.
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