Wall Street closes sharply lower as inflation worries mount

Wall Street closed lower on Wednesday with the S&P suffering its biggest one-day percentage drop since February, as inflation data fuelled concerns over whether interest rate hikes from the United States Federal Reserve could happen sooner than anticipated.

All three major US stock indexes ended the session deep in the red following the US Department of Labor’s April consumer prices report, which showed the biggest rise in nearly 12 years.

The Dow Jones Industrial Average fell 681.5 points, or 1.99 percent, to 33,587.66; the S&P 500 lost 89.06 points, or 2.14 percent, to 4,063.04; and the Nasdaq Composite Index dropped 357.75 points, or 2.67 percent, to 13,031.68.

Of the 11 major sectors in the S&P 500, 10 closed in negative territory, with the consumer discretionary sector down most.

The consumer prices report was hotly anticipated by market participants who have grown increasingly worried over whether current price jumps will defy the Fed’s reassurances by morphing into long-term inflation.

But pent-up demand from consumers flush with stimulus and savings is colliding with a supply drought, sending commodity prices spiking, while a labour shortage drives wages higher.

“The topic on everyone’s mind is obviously inflation,” said Matthew Keator, managing partner in the Keator Group, a wealth management firm in Lenox, Massachusetts. “It’s something the [Fed] has been looking for and they’re finally getting their wish.”

“The question is how long will its fires run hot before starting to simmer?”

That concern is shared by Stuart Cole, head macro economist at Equiti Capital in London.

“Going forward, the big question is just how long can the Fed maintain its dovish stance in opposition to the markets – particularly if companies begin raising wages to encourage unemployed labour back into the workforce, in turn driving a large hole in the Fed’s transitory inflation argument,” Cole said.

The consumer price index (CPI), which excludes volatile food and energy items, grew at 3 percent year-on-year, shooting above the central bank’s average annual 2 percent inflation growth target.

Energy was the sole gainer, advancing 0.1 percent, boosted by rising crude prices.

Market-leading mega-caps, including Amazon.com Inc, Apple Inc, Alphabet Inc, Microsoft Corp and Tesla Inc, fell between 2 percent and 3 percent as investors shied away from what many feel are stretched valuations.

“The CPI number being stronger than expected has led to further weakness in tech stocks,” said Michael James, managing director of equity trading at Wedbush Securities in Los Angeles. “Tech investors are concerned that higher rates are going to lead to multiple compression and less attractive valuations for tech names in a higher rate environment.”

The CBOE Volatility Index, a gauge of market anxiety, closed at 27.64, its highest level since March 4.

Online dating platform Bumble Inc gained in after-hours trading after posting quarterly results.

First-quarter earnings season is on the wane, with 456 constituents of the S&P 500 having reported. Of those, 86.8 percent have beaten consensus estimates, according to Refinitiv IBES data.

Declining issues outnumbered advancing ones on the New York Stock Exchange by a 6.05-to-1 ratio; on Nasdaq, a 3.84-to-1 ratio favoured decliners.

The S&P 500 posted nine new 52-week highs and no new lows, and the Nasdaq Composite Index recorded 34 new highs and 118 new lows.

Volume on US exchanges was 11.82 billion shares, compared with the 10.44 billion average over the last 20 trading days.