U.S. Stocks Extend Sell-Off As Inflation Hits 40-Year High

With traders reacting negatively to a highly anticipated report on consumer price inflation, stocks moved sharply lower during trading on Friday. The steep drop on the day extended the sell-off seen over the course of Thursday’s session.

The major averages finished the day just off their lows of the session. The Dow slumped 880.00 points or 2.7 percent to 31,392.79, the Nasdaq dove 414.20 points or 3.5 percent to 11,340.02 and the S&P 500 tumbled 116.96 points or 2.9 percent to 3,900.86.

For the week, the Dow plunged by 4.6 percent, while the S&P 500 and the Nasdaq plummeted by 5.1 percent and 5.6 percent, respectively.

The sell-off on Wall Street came after the Labor Department released a report showing consumer prices in the U.S. shot up by more than expected in the month of May, raising concerns about the outlook for interest rates.

The Labor Department said its consumer price index jumped by 1.0 percent in May after rising by 0.3 percent in April. Economists had expected consumer prices to increase by 0.7 percent.

With the bigger than expected monthly increase, the annual rate of consumer price growth accelerated to 8.6 percent in May from 8.3 percent in April, showing the biggest surge since December 1981. The annual growth was expected to be unchanged.

Excluding food and energy prices, core consumer prices climbed by 0.6 percent in May, matching the growth seen in the previous month. Core prices were expected to rise by 0.5 percent.

Meanwhile, the annual rate of core consumer price growth slowed to 6.0 percent in May from 6.2 percent in April. Economists had expected the pace of growth to decelerate to 5.9 percent.

The bigger than expected increase in consumer prices is likely to convince the Federal Reserve to follow through on its plans to aggressively raise interest rates in an effort to combat inflation.

The Fed is scheduled to announce its latest monetary policy decision next Wednesday, with the central bank widely expected to raise interest rates by another 50 basis points.

Michael Pearce, Senior U.S. Economist at Capital Economics, said the inflation data raises the possibility the Fed could increase rates by 75 basis points next week.

“The bigger increases in core prices a year ago meant that core inflation still edged down to 6.0% from 6.2%, but there is very little in the details of this report to suggest that inflationary pressures are easing,” Pearce said.

He added, “Together with the continued strength of the latest activity data, that bolsters the argument of the hawks at the Fed to continue the series of 50bp rate hikes into September and beyond, or even to step up the size of rate hikes at coming meetings.”

Adding to the negative sentiment, a separate report released by the University of Michigan showed consumer sentiment in the U.S. has tumbled to its lowest level on record in the month of June.

The preliminary data showed the consumer sentiment index plunged to 50.2 in June from 58.4 in May. Economists had expected the index to edge down to 58.0.

“Consumer sentiment declined by 14% from May, continuing a downward trend over the last year and reaching its lowest recorded value, comparable to the trough reached in the middle of the 1980 recession,” said Surveys of Consumers Director Joanne Hsu.

Sector News

Airline stocks turned in some of the market’s worst performances on the day, with the NYSE Arca Airline Index plummeting by 4.5 percent to a three-month closing low.

Substantial weakness was also visible among banking stocks, as reflected by the 4.3 percent nosedive by the KBW Bank Index. The index ended the session at its lowest closing level in over a year.

Interest rate-sensitive housing stocks also saw considerable weakness, dragging the Philadelphia Housing Sector Index down by 4.3 percent.

Chemical, networking, retail and semiconductor stocks also moved sharply lower, while gold stocks were among the few groups to buck the downtrend.

Other Markets

In overseas trading, stock markets across the Asia-Pacific region moved mostly lower during trading on Friday. Japan’s Nikkei 225 Index slumped by 1.5 percent, while Hong Kong’s Hang Seng Index fell by 0.3 percent.

The major European markets also showed significant moves to the downside on the day. While the German DAX Index plunged by 3.1 percent, the French CAC 40 Index dove by 2.7 percent and the U.K.’s FTSE 100 Index tumbled by 2.1 percent.

In the bond market, treasuries moved sharply lower over the course of the session. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, jumped 11.2 basis points to a three-year closing high of 3.156 percent.

Looking Ahead

The Federal Reserve’s interest rate decision is likely to be in the spotlight next week, while traders are also likely to keep an eye on reports on producer prices, retail sales and industrial production.

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