Stocks extend losses as inflation, interest rate worries persist

U.S. stocks dropped in early trading Thursday as investors digested red-hot inflation data that showed price levels remained elevated in April, signaling more aggressive inflation-fighting efforts by the Federal Reserve may be underway.

The S&P 500 tumbled 1% after the index settled at 3,935.18, or its lowest level since March 2021 in the previous session. The S&P 500 is down more than 17% in the first 90 trading days of 2022, marking its second worst start to a year, according to data from Compound Capital Advisors. The Dow Jones Industrial Average shed 250 points, or 0.8%, and the Nasdaq Composite plunged 1.7%.

The moves build on a streak of sharp losses in equity markets and follow April’s Consumer Price Index (CPI) out Wednesday, which showed an inflation rate that held near a 40-year high despite a marginal pullback from the prior month. Furthermore, the so-called core price index, which excludes the volatile food and energy categories, came in higher than economists had anticipated, stoking worries among investors that elevated prices may persist.

April’s snapshot of inflation across the U.S. comes as investors gauge how aggressively the Federal Reserve will intervene to rein in rising price levels via monetary tightening, including increases on interest rates. Uncertainty around the central bank’s next move has spurred turbulence across risk assets, sending all three major indexes to their lowest trading levels year-to-date.

“Inflation appears to be entrenched within many areas of the economy and regardless if we have witnessed inflation peak, a persistently slow grind lower will be more problematic for the Fed to simultaneously cool inflation without tipping the economy into recession,” Charlie Ripley, a senior investment strategist at Allianz Investment Management, said in an emailed note Wednesday.

Cleveland Fed President Loretta Mester told Yahoo Finance on Tuesday that interest rate hikes of 50 basis points were likely in the next two Federal Reserve policy-setting meetings, while leaving an increase of 75 basis points on the table as the central bank ramps up its inflation-mitigation efforts.

“It’s going to be challenging, no doubt, because there are things going on on both the supply side and the demand side,” Mester said. “But the risks to inflation remaining high get even more risky as we keep going because of inflation expectations, so it’s really important we’re committed to doing what we need to do.”

Peter Essele, head of portfolio management, Commonwealth Financial Network, said if inflation levels out in the second half of the year, there will be less pressure on the Fed to combat elevated price levels with aggressive monetary policies, “which leaves open the possibility of a soft landing of the economy as opposed to the crash and burn that markets have been pricing in as of late.”

“The second half of the year could be a strong period for equities and bonds if inflation continues to moderate and the magnitude of interest rate hikes come in under expectations,” Essele said in a note. “Currently, investors are pricing in a doomsday scenario with inflation and are missing the forest for the trees.”

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9:30 a.m. ET: S&P 500 falls 1%, Dow sheds 250 points, Nasdaq tumbles 1.7%

Here were the main moves in markets at the opening bell on Thursday:

S&P 500 (^GSPC): -31.73 (-0.81%) to 3,903.45
Dow (^DJI): -168.41 (-0.53%) to 31,665.70
Nasdaq (^IXIC): -136.71 (-1.20%) to 11,227.52
Crude (CL=F): +$0.10 (+0.09%) to $105.81 a barrel
Gold (GC=F): -$7.10 (-0.38%) to $1,846.60 per ounce
10-year Treasury (^TNX): -7.8 bps to yield 2.8430%

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9:15 a.m. ET: US producer prices extend climb as inflationary pressures persist

Wholesale inflation rose again in April in a sign elevated consumer prices may continue for longer than expected.

The producer price index for final demand climbed 11% from April of last year and 0.5% on a monthly basis, driven by higher costs for goods, according to Labor Department data released Thursday. That figures also follow notable upward revisions to the March figures.

“Producer price inflation slowed slightly in April but still remains historically high, with nothing to dissuade the Federal Reserve from more rate hikes in the April inflation numbers,” Comerica Bank Chief Economist Bill Adams said in a note. “The Fed will want to see clearer evidence that inflation is cooling and higher interest rates are slowing demand before they start thinking about the endpoint of the current rate hike cycle.”

The so-called core PPI, which excludes the volatile food and energy components, rose 0.4% from a month earlier and was up 8.8% from the same period last year. The measure rose at a softer-than-expected monthly pace but March’s figure was revised up to a 1.2% advance.

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9:07 a.m. ET: New jobless claims unexpectedly rise but remain near 200,000 level

Applications for first-time unemployment filings unexpectedly rose in the latest weekly data but remained near pre-pandemic lows, as a strong labor market and improving levels of unemployment remain a bright spot in the U.S. economy.

The Labor Department’s latest weekly jobless claims report showed 203,000 claims were filed in the week ended May 7, coming in below the 192,000 economists surveyed by Bloomberg had expected.

“It’s probably unrealistic to expect it to fall much below 200,000,” Ted Rossman, senior industry analyst at Bankrate said in a note. “Broadly speaking, the job market is still a source of strength in an economy riddled with worries about inflation, higher interest rates and more.”

Given the surge and then decline in jobless claims, the Labor Department has also now reconfigured the way it adjusts the weekly data to account for seasonal factors. Starting last week, the Labor Department returned to using “multiplicative” seasonal adjustment factors for the data. For much of the pandemic, the department had been using “additive” seasonal adjustments that help smooth out large swings in the weekly numbers.

The 4-week moving average was 192,750, an increase of 4,250 from the previous week’s revised average, according to the Labor Department’s release.

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7:15 a.m. ET: Futures decline as sell-off persists amid inflation, interest rate worries

Here were the main moves in early futures trading Thursday ahead of market open:

S&P 500 futures (ES=F): -16.00 (-0.41%) to 3,914.25
Dow futures (YM=F): -90.00 (-0.28%) to 31,653.00
Nasdaq futures (NQ=F): -90.25 (-0.75%) to 11,879.50
Crude (CL=F): -$1.35 (-1.28%) to $104.36
Gold (GC=F): -$6.80 (-0.37%) to $1,846.90 per ounce
10-year Treasury (^TNX): 0.00 bps to yield 2.9210%

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6:30 a.m. ET: Grocery delivery platform Instacart files for IPO

Instacart Inc., the largest online grocery delivery service in the U.S., has confidentially filed documents for an initial public offering, according to a Bloomberg News report.

The company is reportedly working with banks including Goldman Sachs Group Inc. and JPMorgan Chase & Co. on the move, per Bloomberg, citing people familiar with the matter, who indicated a listing could happen as soon as this year, though the timing may change.

Instacart, which grew sharply during the pandemic as people turned to online grocery shopping, has seen a recent slowdown in growth following its COVID boom as consumers return to in-person supermarket visits.

The company revealed in March that it was cutting its valuation about 40% to $24 billion. Instacart was previously valued at $39 billion in a March 2021 funding round from firms including Andreessen Horowitz, Sequoia Capital and D1 Capital Partners, as well as Fidelity Management & Research Co. and T. Rowe Price Associates Inc, Bloomberg reported.