Wall Street suffered its worst sell-off since the early days of the pandemic after official data showed US inflation rose unexpectedly in August, sparking fears the Federal Reserve will need to act more aggressively to combat rising prices.
The benchmark S&P 500 lost 4.3 percent, its worst day since June 2020 with 99 percent of companies falling in value. The Nasdaq Composite fell 5.2 percent as technology groups seen as most exposed to higher rates bore the brunt of the selling.
The yield on short-term government debt that tracks interest rate expectations hit the highest level in nearly 15 years, as investors increased their bets that the Fed will need to do more to stem rising inflation.
Shares in Asia fell behind Wall Street on Wednesday, with Hong Kong’s benchmark Hang Seng index down 2 percent and Japan’s Topix index down 1.7 percent. China’s CSI 300 fell 1.3 percent, while Australia’s S&P/ASX 200 fell 2.7 percent.
Investors on Tuesday priced a 1-in-3 chance that the U.S. central bank will raise rates by a full percentage point this month, according to CME Group data, instead of the 0.75 percentage point hike that remains the consensus expectation.
The inflation data put additional pressure on policymakers at the US central bank, who vowed to do everything in their power to curb rising prices. Their apparent determination to honor the promise has sparked fears that the economy is headed for a hard landing.
Tech stocks are particularly sensitive to changes in interest rate expectations because valuations are largely based on future growth prospects. Facebook owner Meta and chipmaker Nvidia were among the biggest losers, both down 9 percent, while Amazon fell 7 percent.
The decline shaved $154 billion off Apple’s market valuation and $109 billion off Microsoft’s, with both companies posting their biggest daily losses since September 2020.
Frantic selling on Tuesday hit almost every corner of US financial markets. At one point during the trading day, nearly 2,000 stocks traded on the New York Stock Exchange fell in tandem, a phenomenon commonly seen in times of market stress. Investors raced to hedge against further declines by piling up short contracts on the stock that could pay off if the market continued to fall.
The sharp moves were caused by official figures US consumer prices rose 0.1 percent in August from the previous month, compared with expectations for a 0.1 percent decline. The annual rate was 8.3 percent, down from 8.5 percent in July, but higher than the 8.1 percent forecast by Wall Street economists.
Of most concern to Fed policymakers, core consumer price growth — which strips out volatile items such as energy and food — rose from 5.9 percent to 6.3 percent.
Matt Peron, director of research at Janus Henderson Investors, said the data was “unequivocally negative for equity markets.”
He added: “The warmer than expected report means we will have continued pressure. . . through a rate increase. It also suppresses any ‘Fed pivot’ that markets were hoping for in the near term.”
In the Treasury bond market, the two-year yield, which closely tracks interest rate expectations, rose to its highest level since October 2007, ending the day up 0.18 percentage points at 3.75 percent.
“The most dramatic thing. . . in the Treasury market today there was a move in two-year yields,” said Tom di Galoma of Seaport Global Holdings. “This number clearly put on the map what the Fed is going to do [a 0.75 percentage point increase] and maybe more.”
After the report, investors in the futures market bet that the Fed’s benchmark interest rate will be 4.17 percent by the end of the year, compared to expectations of 3.86 percent before the report. That implies an increase of 0.75 percentage points in September, plus another full percentage point increase during November and December.
The prospect of higher rates sent the dollar soaring, leaving it up 1.4 percent against a basket of six peers. The euro and the pound weakened by 1.4 percent and 1.5 percent, respectively.
Selling cascaded into eurozone bonds, with the German two-year Bund yield up 0.08 percentage points to 1.37 percent and the 10-year yield up 0.08 percentage points to 1.72 percent.
In Europe, the regional Stoxx 600 stock index rose 1.5 percent, after rising 1.8 percent in the previous session. London’s FTSE 100 fell 1.2 percent.
Additional reporting by Hudson Lockett in Hong Kong