Wall Street Wavers As Hot CPI Data Stokes Rate Hike Jitters

Wall Street stocks fluctuated on Wednesday as investors digested surprisingly strong U.S. inflation data, which fueled fears of a larger-than-expected interest rate hike from the Federal Reserve later this month.

All three major U.S. stock indexes burst through the starting gate deep in negative territory on the heels of the Labor Department's highly anticipated Consumer Prices (CPI) data, but have since bounced off lows.

The Nasdaq Composite Index was last in positive territory, while the S&P 500 was essentially unchanged and the Dow Jones Industrial Average was modestly red.

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%.

"The numbers were worse than expected, but the fact that the core (CPI) shows some deceleration year-over-year shows a bit of a hint that this the last hurrah in terms of inflation moving higher," said Peter Cardillo, chief market economist at Spartan Capital Securities in New York.

The report raised chances 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.

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:

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.

"We still don't know what's going to happen but its most likely we're going to have a recession because the Fed is going to have to act aggressively," said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance in Charlotte, North Carolina. "A soft landing is relatively unlikely because that's so difficult to achieve."

"Unfortunately we were looking for good news and this is not good news."

At 2:35PM ET, the Dow Jones Industrial Average fell 73.72 points, or 0.24%, to 30,907.61, the S&P 500 gained 2.39 points, or 0.06%, to 3,821.19 and the Nasdaq Composite added 36.75 points, or 0.33%, to 11,301.48.

Among the 11 major sectors of the S&P 500, industrials and communications services were the biggest percentage losers, while consumer discretionary enjoyed the largest gain.

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 4.8% after the commercial 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 fell 1.9%.

Tesla Inc advanced 3.4%, while chipmakers <.SOX> also gained ground.

Twitter Inc jumped 8.0% after Hindenburg Research said it had taken a significant long position in company's stock.

Declining issues outnumbered advancers on the NYSE by a 1.40-to-1 ratio; on Nasdaq, a 1.12-to-1 ratio favored decliners.

The S&P 500 posted one new 52-week high and 41 new lows; the Nasdaq Composite recorded 10 new highs and 215 new lows.