Wall Street sold off on Tuesday after US inflation data for August came in higher than expected, prompting traders to boost bets for further aggressive interest rate increases from the Federal Reserve to combat rising prices.
The data caught investors off guard, leaving US stocks on track for one of their biggest single-session drops of the year. Yields on short-term government debt reached the highest level in almost 15 years.
The broad S&P 500 share gauge fell 3.3 per cent, while the Nasdaq Composite dropped 4.2 per cent.
The tech-heavy index comprises many companies that are more sensitive to changes in interest rate expectations. Facebook owner Meta, chipmaker Nvidia and Amazon were among the largest fallers in afternoon trading in New York, down 7.6 per cent, 7.4 per cent and 5.4 per cent respectively.
Those moves followed a report on Tuesday that showed US consumer prices ticked up 0.1 per cent in August from the previous month, compared with expectations for a fall of 0.1 per cent. The annual rate came in at 8.3 per cent, down from 8.5 per cent in July, but higher than the 8.1 per cent Wall Street economists predicted.
Core consumer price growth — which strips out volatile items such as energy and food — rose from 5.9 per cent to 6.3 per cent.
“The [consumer price index] report was an unequivocal negative for equity markets. The hotter than expected report means we will get continued pressure from [Federal Reserve] policy via rate hikes. It also pushes back any ‘Fed pivot’ that the markets were hopeful for in the near term,” said Matt Peron, director of research at Janus Henderson Investors.
In the Treasury market, the two-year yield, which is sensitive to changes in interest rate expectations, rose 0.21 percentage points to 3.78 per cent, the highest level since October 2007. While a 0.75 percentage point increase in interest rates is the consensus expectation for the Fed’s September meeting, investors were beginning to price in an almost 30 per cent probability the US central bank would raise rates by a full percentage point, according to data from CME Group.
“The most dramatic thing I saw in the Treasury market today was the move in two-year yields,” said Tom di Galoma at Seaport Global Holdings. “This number put on the map clearly that the Fed is going to do [a 0.75 percentage point increase] and maybe more.”
Following the report, investors in the futures market bet that the Fed’s benchmark interest rate would stand at 4.17 per cent by year-end, versus expectations of 3.86 per cent before the report. That implies a 0.75 percentage point increase in September, plus another full percentage point of increases over the course of November and December.
The prospect of higher rates prompted a jump in the dollar, leaving it up 1.3 per cent against a basket of six peers. The euro and the pound slipped back, both shedding about 1.4 per cent.
The selling cascaded into eurozone bonds, with Germany’s two-year Bund yield up 0.08 percentage points to 1.37 per cent and the 10-year yield rising 0.08 percentage points to 1.72 per cent.
“The markets often react violently to every single report,” said Jim Paulsen, chief investment officer at the Leuthold Group. “I would hope that the Fed views many reports and also realises that past economic policies . . . [such as rate rises] have lagged impacts on inflation and growth which already will likely carry them both lower through at least next spring.”
In Europe, the regional Stoxx 600 share gauge closed 1.5 per cent lower, having climbed 1.8 per cent in the previous session. London’s FTSE 100 shed 1.2 per cent.
In Asia, China’s mainland CSI 300 index rose 0.4 per cent and Hong Kong’s Hang Seng slipped 0.2 per cent as markets in greater China reopened following a national holiday. Japan’s Topix rose 0.3 per cent.
Additional reporting by Hudson Lockett in Hong Kong
