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Wall St drops as strong inflation data fuels rate hike bets

5 minute read

The front facade of the New York Stock Exchange (NYSE) is seen in New York City, U.S., May 4, 2021. REUTERS/Brendan McDermid

Wall Street's major indexes fell on Wednesday after stronger-than-expected inflation data stoked worries of tighter monetary policy to combat what many investors fear could be a prolonged period of inflation.

The Labor Department's data showed U.S. consumer prices increased by the most in nearly 12 years in April as booming demand amid a reopening economy pushed against supply constraints. In the 12 months through April, the CPI shot up 4.2%, from a low base last year. read more

U.S. money markets moved fully to price in a 25 basis point interest rate hike by December 2022 after the data, while yield on 10-year Treasury notes jumped to a two-week high of 1.690%.

"There is uncertainty over how long inflation is going to exist within the current economic recovery because we can see increases in housing prices, commodities around the world and increase in demand for goods and services," Brian Vendig, president, MJP Wealth Advisors in Westport, Connecticut.

"The uncertainty over the path of rates and inflation is making investors reconsider their portfolios, especially in technology stocks and others that had done really well last year."

Among mega-caps, Facebook Inc (FB.O), Amazon.com Inc (AMZN.O), Apple (AAPL.O), Google-parent Alphabet Inc (GOOGL.O) and Microsoft Corp (MSFT.O) fell between 1.8% and 3.3% as prospects of higher rates dampened demand for the high valuation stocks.

The tech-heavy Russell 1000 growth index (.RLG) shed 2.2%, widely underperforming the value counterpart's (.RLV) 0.9% drop, which is more geared towards economically-sensitive financials and energy stocks.

Wall Street's fear gauge (.VIX) rose to 25 points for the first time since March 9.

Rising commodity prices and signs of labor shortage have fueled worries over rising prices, triggering a selloff that sent the S&P 500 nearly 3% below its record closing high on Friday, even as the Fed reassured that any price pressure would be transient.

It will be "some time" before the U.S. economy is healed enough for the Federal Reserve to consider pulling back its crisis levels of support, Fed Vice Chair Richard Clarida had said on Wednesday.

At 11:55 a.m. ET, the Dow Jones Industrial Average (.DJI) was down 405.84 points, or 1.18%, at 33,863.32, the S&P 500 (.SPX) was down 61.25 points, or 1.48%, at 4,090.85. The Nasdaq Composite (.IXIC) was down 300.63 points, or 2.25%, at 13,088.79.

Bank stocks (.SPXBK), which tend to outperform in a rising interest rate environment, gained 0.6%. The energy sector (.SPNY) also added 2.6% tracking higher oil prices.

Nine of the 11 major S&P sectors were lower with technology (.SPLRCI), consumer discretionary (.SPLRCD) and communication services (.SPLRCL) leading losses.

Dating app Bumble Inc (BMBL.O) tumbled 9.2% ahead of its first-quarter results due after market close.

Declining issues outnumbered advancers for a 3.26-to-1 ratio on the NYSE and for a 2.09-to-1 ratio on the Nasdaq.

The S&P index recorded eight new 52-week highs and no new low, while the Nasdaq recorded 28 new highs and 68 new lows.

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