S&P 500 Closes Down As Hot Inflation Data Hints At Steep Fed Rate Hike

The S&P 500 index ended lower on Wednesday after fluctuating for much of the session as investors digested hotter-than-expected U.S. inflation data, which fueled fears that the Federal Reserve could raise key interest rates by as much as 100 basis points later this month.

All three major U.S. stock indexes bounced off lows reached early in the day.

Year-on-year consumer price growth accelerated to a scorching 9.1%, the hottest reading since November 1981, driven by an 11.2% monthly spike in gasoline prices.

Stripping away volatile food and energy prices, which have abated since the report's survey period, core CPI cooled down to an annual rate of 5.9%.

"You would expect the CPI (report) that we saw would be a big risk-off event, but the market has shrugged," said Ross Mayfield, investment strategy analyst at Baird in Louisville, Kentucky. "(Investors) were already expecting a very hawkish Fed and I don't think this affects much except uncertainty and that has something to do with why markets aren't selling off today."

The report raised odds that the Federal Reserve will raise interest rates even more than the 75 basis points previously expected. Traders of futures tied to the Fed funds target rate have now priced more than a 50% probability of a larger, 100 basis point, hike at the conclusion of its policy meeting later this month.

"If the Fed looks past the headline number, they'll see commodity prices have already begun to soften a bit" since the CPI survey period, Mayfield said, adding that a 100-basis-point rate hike based on the June CPI report could put central bank policy "behind the curve."

As seen in the graphic below, core CPI appears to confirm that inflation continues to ease from the March peak, but still has a long way to go before approaching the central bank's average annual 2% inflation target:

(Graphic: Inflation:

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The question over whether the Fed's policy tightening could rein in inflation without tipping the economy into recession appears to be shifting to how severe the downturn is likely to be.

According to preliminary data, the S&P 500 lost 17.70 points, or 0.46%, to end at 3,801.10 points, while the Nasdaq Composite lost 18.87 points, or 0.17%, to 11,245.86. The Dow Jones Industrial Average fell 214.73 points, or 0.69%, to 30,766.60.

The second-quarter earnings season will hit full stride on Thursday, when JPMorgan Chase & Co and Morgan Stanley are due to post results, followed by Citigroup and Wells Fargo & Co on Friday.

As of last Friday, analysts saw aggregate annual S&P earnings growth of 5.7% for the April to June period, down from the 6.8% forecast at the beginning of the quarter, according to Refinitiv.

Shares of Delta Air Lines slid after the carrier's second-quarter earnings missed expectations, although Chief Executive Ed Bastian said strong travel demand will result in "meaningful" full-year profit.

The broader S&P 1500 Airlines index also declined.

Tesla Inc and chipmakers also gained ground.

Twitter Inc shares jumped after Hindenburg Research said it had taken a significant long position in company's stock.