Shares fell on Wednesday after consumer prices saw their largest annual surge in more than 30 years in October, prompting investors to hedge against inflation and sparking a surge in bond yields.
As US Treasury bond yields skyrocketed, investors sold soaring technology stocks and raised bank stocks. They also took refuge in gold and bitcoin.
The Dow Jones Industrial Average lost around 270 points, or 0.7%. The S&P 500 lost 1%. The tech-heavy Nasdaq Composite lost about 2%.
The consumer price index rose 6.2% year over year, well above the 5.9% estimate of the Dow Jones surveyed economists and the largest annual increase since 1990. On a monthly basis, the CPI rose 0.9% compared to the estimate of 0.6%. The CPI is a basket of products ranging from gasoline and healthcare to groceries and rentals.
“Wednesday’s consumer price index showed another month of inflation data well above the Federal Reserve’s inflation target, largely due to ongoing supply chain problems and labor shortages. Unless inflation subsides, the Federal Reserve may have to pull back more sharply and raise interest rates, which could hurt stocks and bonds, “said Nancy Davis, founder of Quadratic Capital Management.
Following the CPI data, traders increased their expectations for the timing of the Fed’s first rate hike. The Fed funds futures market now sees greater chances of the central bank’s first full rate hike in July 2022.
The benchmark ten-year government bond yield, which has been trending lower for the past few weeks, rose about 10 basis points on Wednesday after the CPI measurement. (1 basis point equals 0.01 percentage points.) A weak auction of 30-year bonds on Wednesday afternoon reinforced the rise.
Technology stocks have come under pressure as rising interest rates depreciate the value of future earnings and therefore hit growth stocks particularly hard. Advanced Micro Devices fell by more than 5%, Nvidia by more than 4% and Google parent Alphabet by more than 2%.
Meanwhile, bank stocks were boosted by the rise in bond yields, which limited losses for the market as a whole. Higher interest rates mean banks charge higher interest rates on loans, which usually increases profits. Both Bank of America and Wells Fargo rose.
Also on a positive note, Tesla, the leader of the bull market whose stocks have come under pressure recently, added about 2% to cut losses to about 15% for the week. The stock was among the top winners of the S&P 500 on Wednesday. Electric vehicle manufacturers are in focus on Wednesday as Amazon-backed EV startup Rivian goes public.
Investors looked for inflation hedges outside of stocks and bonds as well. Gold and Bitcoin rose as investors looked for assets that could hold up better as prices rose.