Hotter-Than-Expected Inflation Data Triggers Sell-Off On Wall Street

Stocks moved sharply lower over the course of the trading session on Tuesday, largely offsetting the recent recovery rally. The major averages all showed substantial moves to the downside, snapping a four-session winning streak.

The major averages climbed off their worst levels going into the close but still posted steep losses on the day. The Dow plunged 1,276.37 points or 3.9 percent to 31,104.97, the Nasdaq dove 632.84 points or 5.2 percent to 11,633.57 and the S&P 500 plummeted 177.72 points or 4.3 percent to 3,932.69.

The sell-off on Wall Street came following the release of the Labor Department’s highly anticipated report on consumer price inflation in the month of August.

The report showed an unexpected monthly uptick in consumer prices as well as a smaller than expected slowdown in the annual rate of price growth.

The Labor Department said its consumer price index inched up by 0.1 percent in August after coming in unchanged in July. Economists had expected consumer prices to edge down by 0.1 percent.

The modest increase in consumer prices came as higher prices for shelter, food and medical care offset another steep drop in gasoline prices.

Compared to the same month a year ago, consumer prices were up by 8.3 percent in August, reflecting a slowdown from the 8.5 percent spike in July. However, economists had expected the annual rate of growth to slow to 8.1 percent.

The report also showed core consumer prices, which exclude food and energy prices, climbed by 0.6 percent in August after rising by 0.3 percent in July. Core prices were expected to increase by another 0.3 percent.

Meanwhile, the annual rate of growth by core consumer prices accelerated to 6.3 percent in August from 5.9 percent in July. The annual rate of growth was expected to rise to 6.1 percent.

The data led to renewed concerns about the outlook for interest rates ahead of the Federal Reserve’s monetary policy meeting next week.

Paul Ashworth, Chief U.S. Economist at Capital Economics, said the faster than expected core price growth “confirms” that the Federal Reserve will raise interest rates by at least 75 basis points next week.

“There might be some late speculation that the Fed could even go for a 100bp hike although, with rates now close to neutral, we doubt that will happen,” Ashworth said.

CME Group’s FedWatch Tool is currently indicating a 68.0 percent chance of a 75 basis point rate hike and a 32.0 percent chance of a 100 basis point rate hike.

“This inflation report killed any chance of a downward shift in Fed tightening as core goods and services pricing pressures remain hot,” said Edward Moya, senior market analyst and OANDA. “It doesn’t seem companies are offering significant discounts here to lower inventories.”

Sector News

Semiconductor stocks turned in some of the market’s worst performances on the day, resulting in a 6.2 percent nosedive by the Philadelphia Semiconductor Index.

Interest rate-sensitive housing stocks also saw substantial weakness, as reflected by the 5.9 percent plunge by the Philadelphia Housing Sector Index.

Retail stocks also showed a significant move to the downside, dragging the Dow Jones U.S. Retail Index down by 5.8 percent.

Computer hardware, telecom, airline and biotechnology stocks also saw considerable weakness amid broad based selling on Wall Street.

Other Markets

In overseas trading, stock markets across the Asia-Pacific region moved mostly higher during trading on Tuesday. Japan’s Nikkei 225 Index rose by 0.3 percent, while China’s Shanghai Composite Index inched up by 0.1 percent.

Meanwhile, the major European markets moved sharply lower following the U.S. inflation report. While the U.K.’s FTSE 100 Index slumped by 1.2 percent, the French CAC 40 Index tumbled by 1.4 and the German DAX Index dove by 1.6 percent.

In the bond market, treasuries saw further downside in reaction to the inflation data. As a result, the yield on the benchmark ten-year note, which moves opposite of its price, climbed 6 basis points to a three-month closing high of 3.422 percent.

Looking Ahead

Inflation data may remain in focus on Wednesday, as the Labor Department is scheduled to release its report on producer prices in the month of August.

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