Stocks were lower Wednesday in volatile trading. The markets were focused on the inflation rate even after the latest government data suggested the worst of price increases could be over. Investors simply weren’t buying that the squeeze is going to end anytime soon.
The Dow Jones Industrial Average fell 142 points or 0.4%. The S&P 500 declined 0.8%, while the Nasdaq Composite dropped 2.3%.
The consumer price index rose 8.3% year over year in April, the Labor Department reported Wednesday, higher than expectations for 8.1%, but a reduction from the 8.5% increase seen in March. Soaring services prices, such as airfares up 18.6% month over month, were driving the inflation higher.
“People believe the Fed is going to slow down the economy and untimely that’s going to weigh on stocks,” said David Petrosinelli, managing director of sales and trading at InspereX.
CPI, which excludes the more volatile food and energy, rose 6.2% in April, down from 6.5% in March.
One key reason the inflation rate declined is that prices in the economy had already begun to rise by this time last year as the U.S. government had already deployed trillions of dollars of fiscal stimulus and Americans were getting Covid-19 vaccines, enabling reopenings.
Analysts think, that “inflation has likely peaked, as base effects pushed the year-over-year metrics down in April relative to March,” wrote Jeffrey Roach, chief economist for LPL Financial.
But there’s one problem.
It is possible that inflation has peaked, and the ride downward might be slow, as price gains could still be generally high. “We think it has but it is a long [way] from 8% to 2%,” wrote NatAlliance Securities’ Andrew Brenner.
Investors are looking forward that easing inflation could indicate that the Federal Reserve won’t act as aggressively as some fear in lifting short-term interest rates, a move that can put a dent into economic growth.
But inflation isn’t declining that quickly—and that could embolden the Federal Reserve to lift short-term interest rates at a brisk pace. “The inconvenient truth is the Fed is going to need to raise rates more quickly and to a higher level than many were hoping,” wrote Chris Zaccarelli, chief investment officer at Independent Advisor Alliance
The bond market was signaling as much.
The 2-year Treasury yield, which attempts to forecast the level of the benchmark lending rate a couple of years from the present, rose to 2.65% from 2.6% minutes before the inflation data was published.
The 10-year Treasury yield also ticked up to as high as 3.04% from 2.95% minutes before the release. The yield came back down to 2.93%. The initial burst higher, though, was hurting high-growth technology stocks, which are valued on the basis that they will pump out a chunk of their profits many years down the line.
Overseas, the pan-European Stoxx 600 rose 1.7%, and Tokyo’s Nikkei 225 climbed 0.2%.
