Wall Street Falls As Inflation Data Fuels Rate Hike Fears

Wall Street's main indexes slid on Wednesday after hotter-than-expected inflation data fanned fears that the Federal Reserve might take a more aggressive stance on interest rate hikes, potentially tipping the economy into a recession.

Surging prices globally are driving central banks to raise borrowing costs this year, triggering concerns that a reversal of decades-long easy-money policies could lead to a sharp economic downturn.

The benchmark S&P 500 was set to reverse its gains in July after recording its worst first-half performance since 1970.

U.S. consumer prices accelerated in June as gasoline and food costs remained elevated, data showed, resulting in the largest annual increase in inflation in 40-1/2 years and cementing the case for the Fed to hike interest rates by 75 basis points later this month.

"Hotter inflation equals a more aggressive Federal Reserve. Powell is going to see inflation peak, which it might be in July," said Anthony Saglimbene, global market strategist at Ameriprise Financial in Troy, Michigan.

"Right now, the Fed is not your friend. At least from an investor stand point and until that changes, it's going to be hard for stocks to gain traction."

Traders of futures tied to the Fed's policy rate swiftly priced in a more than 40% probability of an even bigger 100-basis-point rise at the upcoming meeting, up from about a one-in-nine chance seen before the report.

The market though still expects the Fed to raise the rate by 75 basis points, with a 72% chance attached. [FEDWATCH]

"It's most likely we're going to have a recession because the Fed is going to have to act aggressively. A soft landing is relatively unlikely because that's so difficult to achieve," said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance.

BofA economists now expect a mild U.S. recession this year and forecast a 1.4% decline in real gross domestic product (GDP) in the fourth quarter.

U.S. Treasury yields jumped after the data, while a well-known Wall Street fear gauge, the CBOE Volatility index, edged higher after touching a one-week high earlier in the session.

JPMorgan Chase & Co and Morgan Stanley will be the first among big U.S. banks to report quarterly results this week, kicking off the second-quarter reporting season in earnest.

Earnings reports will be parsed for how companies are coping with rising costs, with investors also closely watching profit forecasts to gauge the likelihood of a recession.

At 10:33 a.m. ET, the Dow Jones Industrial Average was down 304.59 points, or 0.98%, at 30,676.74, the S&P 500 was down 28.80 points, or 0.75%, at 3,790.00, and the Nasdaq Composite was down 51.93 points, or 0.46%, at 11,212.80.

Tesla rose almost 2%, limiting losses in the S&P 500 and the Nasdaq, while chipmakers also gained ground.

Twitter Inc rose 5.1% after Hindenburg Research said it had taken a significant long position in the social media company.

Shares of Delta Air Lines Inc fell 6.1% after the company's second-quarter adjusted profit fell short of expectations.

Declining issues outnumbered advancers for a 3.54-to-1 ratio on the NYSE and a 1.62-to-1 ratio on the Nasdaq.

The S&P index recorded one new 52-week high and 41 new lows, while the Nasdaq recorded five new highs and 190 new lows.