NEW YORK — Stocks are falling and disappointment hit markets around the world on Tuesday, after Wall Street suddenly realized that inflation is not slowing as much as expected.
the&P 500 was down 3% in afternoon trading, 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 had expected.
The higher-than-expected reading means traders are bracing for the Federal Reserve to finally raise interest rates even higher than expected to combat inflation, with all the risks to the economy that that entails. Fears over higher rates sent prices tumbling for everything from gold to cryptocurrencies to crude oil.
“Right now, it’s not the journey that’s as worrying as the destination,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments. “If the Fed wants to raise and hold, the big question is at what level.”
The Dow Jones Industrial Average lost 882 points, or 2.7%, to 31,499 by 12:45 pm ET, and the Nasdaq Composite Index fell 3.8%. Big tech stocks tumbled more than the rest of the market as all 11 sectors that make up the S&P 500 sank.
Most of Wall Street began the day thinking the Fed would raise its key short-term rate by three-quarters of a percentage point at its meeting next week. But the hope was that inflation was falling rapidly to more normal levels after peaking in June at 9.1%.
The idea was that such a slowdown would allow the Fed to reduce 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 within it were worse than economists expected, including some the Fed pays particular attention to, such as inflation outside of food and energy prices.
Markets were focused on a 0.6% rise in such prices in August from July, double what economists had expected, said Gargi Chaudhuri, head of investment strategy at iShares.
The inflation figures were so much worse than expected that traders now see a one in five chance that the Fed will raise rates by a full percentage point next week. That would be four times the usual move, and no one in the futures market predicted such an increase the day before.
Traders now see a greater than 60% chance that the Federal Reserve will raise its fed funds rate to a range of 4.25% to 4.50% by March. A day earlier, they saw a less than 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 hikes by three-quarters of a percentage point. The fed funds rate is currently in a range of 2.25% to 2.50%.
“The Fed cannot allow inflation to persist. You have to do whatever it takes to keep prices from going up,” said Russell Evans, managing director of Avitas Wealth Management. “This indicates that the Fed still has a lot of work to do to reduce 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 reached their highest level since 2008, creating problems for the housing industry. The hope is that the Fed can manage to walk the tightrope of slowing the economy enough to eliminate high inflation, but not enough to create a painful recession.
Tuesday’s data further threatens hopes of a “soft landing.” Meanwhile, higher rates are also pushing down the prices of stocks, bonds and other investments.
Investments seen as the most expensive or the most risky are the most affected by the higher rates. Bitcoin fell 6.7%.
In the stock Exchangeall but seven of the shares in the S&P 500 fell. Technology and other high-growth companies fell more than the rest of the market because they are seen as most at risk from higher rates.
Apple, Microsoft and Amazon fell more than 4% and were the market’s heaviest hitters. The communication services sector, which includes Google’s parent company and other media and internet companies, sank 4.3%, the biggest loss of the 11 sectors that make up the S.Index &P 500.
Losses certainly only return the S&P 500 close to where he was before his recent winning streak. That run was based on hopes that Tuesday’s inflation report would show a more comforting slowdown. The resulting drop fits what has become a pattern on Wall Street this year: Stocks fall on concerns about inflation, rise on hopes the Fed will raise rates, then fall again when data undermines those hopes.
Tuesday’s inflation report came before trading began on Wall Street, but it had a huge impact on markets around the world.
Treasury yields jumped immediately on expectations of a more aggressive Fed. The two-year Treasury yield, which tends to follow expectations for Fed actions, soared to 3.75% from 3.57% late Monday. The 10-year yield, which helps determine where mortgage and other loan rates go, rose to 3.43% from 3.36%.
Meanwhile, Europe’s stock markets turned from gains to losses. The German DAX lost 1.6% and the French CAC 40 fell 1.4%.
Expectations of a more aggressive Fed also helped the dollar add to its already strong gains this year. The dollar has been rising against the euro, Japanese yen and other currencies in large part because the Fed has been raising rates faster and with larger spreads than many other central banks.
An index that measures the value of the dollar against several major currencies rose 1.2%.
AP business writer Damian J. Troise contributed.