NEW YORK — (AP) — Wall Street shook on Friday and stocks tumbled after being hammered by data showing inflation is getting worse, not better, as investors had hoped.
The S&P 500 was down 2% in the first half hour of trading, as moves in the bond market signaled investors feared a possible recession. The Dow Jones Industrial Average was down 611 points, or 1.9%, at 31,661 at 9:55 a.m. EST, and the Nasdaq composite was down 2.4%.
Wall Street entered Friday on hopes that a much-anticipated Consumer Price Index report would show the worst inflation in generations slowed a bit in the past month. Instead, the US government said inflation accelerated to 8.6% in May from 8.3% a month earlier.
The Federal Reserve has already begun raising interest rates and taking other steps to slow the economy, hoping to bring inflation down. Wall Street took Friday’s reading to mean the Fed’s foot will remain firmly on the brakes in the economy, dashing hopes it could pause later this year.
Markets increasingly expect the Fed to raise its main short-term interest rate by half a percentage point at each of its next three meetings, starting next week. This third in September had been the subject of debate among investors in recent weeks. The Fed has only raised rates this high once since 2000, last month.
“Inflation is hot, hot, hot,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments. “Basically everything was in place. No relief is in sight, but a lot can change by September. Nobody knows what the Fed will do in a few months, including the Fed.
The price of a stock basically goes up and down based on two things: the profit a company produces and the price an investor is willing to pay for it. The movements of the Fed on interest rates strongly influence this second part.
Since the start of the pandemic, the historically low interest rates put in place by the Fed and other central banks have encouraged investors to pay higher prices for their investments. Now “easy mode” is abruptly and forcefully disabled.
In addition, overly aggressive rate hikes by the Fed could ultimately push the economy into a recession. Higher interest rates make borrowing more expensive, which weighs on household and business spending and investment.
The two-year Treasury yield climbed to 2.94% following the inflation report, after hitting its highest level since 2018. It is up from 2.83% on Thursday evening.
The 10-year rate also rose, but more modestly than the two-year rate, which is influenced more by expectations of Fed moves. The 10-year yield fell from 3.04% to 3.10%.
The narrowing of the spread between these two yields is a signal that bond market investors are more concerned about economic growth. Usually the spread is wide, with 10-year yields higher because they force investors to hold onto their dollars longer.
If the two-year yield rises above the 10-year yield, some investors see this as a warning sign of a recession hitting in a year or two.
“A higher-than-expected CPI seals the deal on investor fears,” Mike Loewengart, managing director at Morgan Stanley’s E-Trade, wrote in a research note. “And although consumers are experiencing high prices on a daily basis, especially at the pumps, it is disappointing to see that we have yet to get inflation under control, despite the Fed’s efforts.”
The S&P 500 is on track to close its ninth losing week in the past 10.
Stocks also fell in Europe for a second day after the European Central Bank said it would soon raise interest rates for the first time in more than a decade to fight inflation.
The German DAX lost 2.4%, the French CAC fell 2.4% and the FTSE 100 in London fell 2.1%.
In Asian trading, Shanghai shares rose 1.4% after news that inflation remained subdued at 2.1% in May.
With inflation below the government’s 3% target, Chinese leaders have more leeway to offer supportive policies to their economy when anti-COVID restrictions may slow business.
Tokyo’s Nikkei 225 lost 1.5%, while Seoul’s Kospi lost 1.1%.
AP Business Writer Elaine Kurtenbach contributed.
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