The release of yet another hotter-than-expected inflation signal sent stocks lower on Friday. This added to recent weakness, largely inspired by fears about interest rate policy, with the S&P 500 recording its lowest close in a month.
The Nasdaq Composite (COMP.IND) closed -1.7%, the S&P 500 (SP500) finished -1.1% and the Dow (DJI) ended -1.0%.
The Nasdaq led the slide among the major averages, dropping by 195.46 points to close at 11,394.94. The Dow Jones slumped 336.99 points to end at 32,816.92, while the S&P 500 fell 42.28 points to finish at 3,970.04.
Nine of the 11 S&P sectors lost ground, led by 1.8% slides in Real Estate and Info Tech. Communication Services, Consumer Discretionary and Health Care all fell more than 1%. Materials and Financials ended higher.
“Having ripped upwards unceasingly since the October lows, markets let off some steam this week. This is to be expected,” Alex King of Cestrian Capital Research told Seeking Alpha. “What is rather more surprising is the lack of any major collateral damage to equities arising from the aggressive move up in the 10-year yield, which is back at a level last seen in November when equities were much lower.”
King added: “We believe this is evidence that risk assets can tolerate a higher sustained rate of inflation and Fed funds rate yet still move up. We continue to look upwards for 2023.”
Friday’s slide came as investors digested another stronger-than-expected inflation figure. Government statistics showed that the PCE price index, considered a favorite indicator for the Federal Reserve, rose 0.6% in January compared to the previous month. This topped the 0.4% increase that economists were predicting.
The same report showed that personal spending rose 1.8% in January, also stronger than projected. These figures cemented the growing narrative that the Fed will need to remain hawkish for longer than previously expected to get inflation under control.
Currently, the market is pricing in a 27% chance that the central bank will raise its key rate by 50 basis points at its next meeting, with a 73% probability that the hike will match February’s 25-basis-point increase. A week ago, the chance of a 50-basis-point rise sat at 18%. It was less than 3% a month ago.
The inflation report sparked selling in the bond market, sending yields higher. The 10-year Treasury yield (US10Y) climbed 7 basis points to 3.95%. The 2-year yield (US2Y) rose 12 basis points to 4.81%.
Among active stocks, Adobe (ADBE) dropped amid reports that U.S. regulators were planning to move against the firm’s $20B purchase of web designer Figma. Meanwhile, Beyond Meat (BYND) rallied in the wake of its Street-beating earnings report.