Worries over worsening inflation weighed heavily on Wall Street on Wednesday, pulling the U.S. stock market further from its record high and sending bond yields to their loftiest levels in years.
The S&P 500 dropped 1.1% and was on track for its fifth loss in six days since setting an all-time high. The Dow Jones Industrial Average fell 171 points, or 0.3%, while the Nasdaq composite slid 1.6%.
Hotter-Than-Expected Inflation Report Rattles Markets
Stocks came under pressure from rising yields in the bond market after a report showed U.S. consumers paid 3.7% more last month for fuel, food and other costs of living than a year earlier. That marked an acceleration from August’s 3.4% rate and came in above the 3.6% economists had expected.
Inflation has remained more painful than anyone would like since the economy emerged from the crater created by the COVID-19 pandemic. It has drawn fresh momentum recently from jumps in fuel prices tied to the war with Iran, with a barrel of Brent crude adding 1% Wednesday to $106.71.
Treasury Yields Climb to Multi-Year Highs
The combination of a hotter inflation reading, signals that the U.S. economy is still growing and longstanding worries about fast-rising government debt loads has pushed yields to their highest levels in years or even decades across bond markets worldwide.
The 10-year Treasury, the centerpiece of the U.S. bond market, saw its yield rise to 5.23% from less than 5.17% just before the inflation report’s release. During morning trading, it briefly jumped above 5.32%, pulling back toward its highest level since 2002.
Yields on shorter-term Treasurys posted even bigger leaps as traders raised their expectations for coming interest rate hikes by the Federal Reserve.
Traders Boost Bets on Fed Rate Hike
The Fed last month raised the interest rate it controls, which affects very short-term loans, for the first time in three years in hopes of reining in inflation. Higher rates accomplish that by making borrowing more expensive for everyone and slowing the overall economy.
Traders now see a 39% chance that the Fed will raise the federal funds rate at its next meeting in two weeks, up from the 22% probability seen just a day earlier, according to data from CME Group.
“The consumer price index was a little hotter than expected, but not scorching hot,” said Brian Jacobsen, chief economic strategist at Annex Wealth Management. “It was just hot enough to keep traders on edge.”
Consumer Spending Keeps Price Pressures Alive
Part of what is keeping inflation high is that Americans broadly continue to spend, which in turn encourages businesses to keep raising prices for their own products and services. As Americans become more price-sensitive and the economy benefits from greater worker productivity, Vanguard Senior Economist Adam Schickling said inflation should slow, but “patience will be required.”
Higher bond yields push downward on stock prices, and the main way companies can offset that is by delivering bigger profits. That is exactly what analysts are expecting, and it is how the S&P 500 has managed to set records despite the many challenges weighing on Wall Street.
Mixed Earnings Picture for Financial Giants
BlackRock rose 0.1% after the investment company reported stronger profit and revenue for the summer than analysts expected. Customers poured a net $205 billion into BlackRock’s funds, including iShares exchange-traded funds, from July through September, bringing total assets under management to $15.5 trillion. BlackRock earns money by charging fees on those dollars.
But the high expectations for profit growth also mean companies will likely be punished if they fall short of targets, which is what several other financial companies did Wednesday morning.
- Bank of America dropped 6% after reporting weaker third-quarter profit and revenue than analysts expected. The profit would have fallen short even after ignoring $1.2 billion in fines announced late Tuesday by the U.S. Treasury Department for alleged violations of anti-money laundering and sanctions laws.
- State Street sank 6.2% after reporting weaker revenue for the latest quarter than analysts expected, even though its profit came in slightly above forecasts.
Homebuilders Hit by Mortgage Rate Pain
The higher bond yields also hurt some stocks in particular because of their effect on the cost to borrow money.
Homebuilders are finding potential customers turned off by mortgage rates at their highest level in nearly three years. Their stocks sank further on Wednesday, including drops of 2.8% for Lennar, 3% for PulteGroup and 2.5% for D.R. Horton.
Overseas Markets Mixed
In stock markets abroad, indexes ticked higher in Europe following a weaker finish in Asia. Indexes rose 0.6% in Paris and fell 0.9% in Shanghai, marking two of the world’s bigger moves.
