Stocks stumble lower after inflation rises again in April

Wednesday, May 11, 2022

NEW YORK (AP) — Stocks fell on Wall Street Wednesday after a report on inflation came in worse than feared last month.

The S&P 500 was 0.6% lower after waffling between gains and losses in early trading. The Dow Jones Industrial Average was down 91 points, or 0.3%, at 32,033, as of 1:25 p.m. Eastern time, and the Nasdaq composite was 1.8% lower as tech stocks weighed down the broader market.

Wall Street has been transfixed on the nation’s high inflation, and where it’s heading, because it’s causing the Federal Reserve to yank the supports it propped under markets for most of the pandemic. The Fed has flipped aggressively toward raising interest rates after seeing high inflation last longer than it expected.

Wednesday’s report from the U.S. Labor Department showed inflation slowed a touch in April, down to 8.3% from 8.5% in March. Investors also found some glass-half-full signals in the data that inflation may be peaking and set to ease further.

Nevertheless, the numbers were still higher than economists forecast. They also showed a bigger increase than expected in prices outside food and gasoline, something economists call “core inflation” and which can be more predictive of future trends.

“Core inflation came in hot, and that’s what really matters to the Fed at this point,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments.

Economists said the inflation report will keep the Fed on track for rapid and potentially sharp increases in interest rates in upcoming months, though the data led to erratic trading on Wall Street.

Treasury yields initially jumped but pared their gains as the morning progressed. As the yields regressed, most stocks reversed their early losses.

The 10-year Treasury yield climbed as high as 3.08% but fell back to 2.93% in later trading, below its late-Tuesday level of 2.99%. The two-year yield, which moves more on expectations for Fed action, rose to 2.65% from 2.62% late Tuesday. It had climbed as high as 2.75% shortly after the report’s release.

To corral high inflation, the Fed has already pulled its key short-term interest rate off its record low near zero, where it spent most of the pandemic. It also said it may continue to hike rates by double the usual amount at upcoming meetings. Such moves by design would slow the economy, in hopes of quashing inflation.

The Fed risks causing a recession if it raises rates too high or too quickly. Even if it’s deft enough to avoid a downturn, higher rates push down on prices for stocks and all kinds of investments in the meantime. That’s because higher-yielding, safe Treasury bonds suddenly become a stronger competitor for investors’ dollars.