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NEW YORK — Stocks tumble and disappointment hit markets around the world on Tuesday after Wall Street’s sudden realization that inflation is not easing as much as hoped.
pThe &P 500 was 3% lower in afternoon trade, threatening to snap a four-day winning streak. Bond prices also fell sharply, sending their yields higher after a report showed inflation slowed to just 8.3% in August instead of the 8.1% economists expected.
The warmer-than-expected reading means traders are bracing for the Federal Reserve to eventually raise interest rates even higher than expected to combat inflation with all the risks to the economy that entails. The fear of higher rates caused prices to fall for everything from gold to cryptocurrencies to crude oil.
“Right now, it’s not the journey that worries as much as the destination,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments. “If the Fed wants to hike and hold, the big question is at what level.”
The Dow Jones Industrial Average lost 882 points, or 2.7%, to 31,499, at 12:45 p.m. ET, and the Nasdaq composite was down 3.8%. Major tech stocks swooned more than the rest of the market, as all 11 sectors that make up the S&P 500 sank.
Most of Wall Street entered the day believing the Fed would raise its short-term key rate by a hefty three-quarters of a percentage point at its meeting next week. But the hope was that inflation was in the midst of quickly falling back to more normal levels after peaking in June at 9.1%.
The thinking was that such a slowdown would let the Fed scale back the size of its rate hikes through the end of this year and then potentially hold steady through early 2023.
Tuesday’s report dashed some of those hopes. Many of the data points in it were worse than economists expected, including some that the Fed is paying particular attention to, such as inflation outside of food and energy prices.
Markets braced for a 0.6% rise in such prices in August from July, double what economists expected, said Gargi Chaudhuri, head of investment strategy at iShares.
The inflation numbers were so much worse than expected that traders now see a one in five chance of a full percentage point rate hike by the Fed next week. That would be four times the usual move, and no one in the futures market predicted such a rise a day earlier.
Traders now see a better than 60% probability that the Fed will pull its federal funds rate all the way up to a range of 4.25% to 4.50% in March. A day earlier, they saw less than a 17% chance of such a high rate, according to CME Group.
The Fed has already raised its benchmark interest rate four times this year, with the last two increases by three-quarters of a percentage point. The federal funds rate is currently in a range of 2.25% to 2.50%.
“The Fed can’t let inflation continue. You have to do whatever it takes to stop prices from going up,” said Russell Evans, managing director at Avitas Wealth Management. “This indicates that the Fed still has a lot of work to do to bring down inflation.”
Higher rates hurt the economy by making it more expensive to buy a house, a car or anything else bought on credit. Mortgage rates have already hit their highest level since 2008, causing pain for the housing industry. The hope is that the Fed can pull back on slowing the economy enough to stop high inflation, but not so much that it creates a painful recession.
Tuesday’s data puts hopes for such a “soft landing” under more threat. Meanwhile, higher interest rates also push down the prices of stocks, bonds and other investments.
Investments that are seen as the most expensive or riskiest are those that are hardest hit by higher interest rates. Bitcoin fell 6.7 percent.
On the stock market, all but seven shares are in SThe &P 500 fell. Technology and other high-growth companies fell more than the rest of the market because they are considered the most exposed due to higher rates.
Apple, Microsoft and Amazon all fell more than 4% and were the heaviest weights in the market. The communications services sector, which includes Google’s parent company and other Internet and media companies, sank 4.3% for the biggest loss of the 11 sectors that make up the S.&P 500 index.
To be sure, the losses return only S&P 500 close to where it was before the recent winning streak. That run was built on hopes that Tuesday’s inflation report would show a more reassuring slowdown. The ensuing wipeout fits what has become a pattern on Wall Street this year: Stocks fall on inflation worries, rise on hopes the Fed may ease interest rates, then fall again when data undercut those hopes.
Tuesday’s inflation report arrived before trading began on Wall Street, but it sent a shockwave through markets around the world.
Treasury yields immediately jumped on expectations of a more aggressive Fed. The yield on the two-year Treasury note, which usually tracks expectations for Fed action, rose to 3.75% from 3.57% late Monday. The 10-year yield, which helps dictate where mortgage and other loan rates are headed, rose to 3.43% from 3.36%.
Stock markets in Europe, meanwhile, went from gains to losses. Germany’s DAX lost 1.6% and France’s CAC 40 fell 1.4%.
Expectations for a more aggressive Fed also helped the dollar add to its already strong gains for this year. The dollar has rallied against the euro, Japanese yen and other currencies, in large part because the Fed has raised interest rates faster and by larger margins than many other central banks.
An index that measures the dollar’s value against several major currencies rose 1.2%.
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AP Business Writer Damian J. Troise contributed.
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