Dow falls 350 points after January wholesale inflation rises more than expected

U.S. stock indexes fell Thursday morning as investors digested another hot inflation report that showed price pressures at the wholesale level rose more than expected in January, fueling concerns that the Federal Reserve will raise interest rates higher than expected.

How are stock-index futures trading
  • The S&P 500
    dropped 48 points, or 1.2%, to 4,099

  • The Dow Jones Industrial Average
    was off 358 points, or 1%, to 33,771

  • The Nasdaq Composite
    declined 128 points, or 1.1%, to 11,940

On Wednesday, the Dow Jones Industrial Average rose 39 points, or 0.11%, to 34,128, the S&P 500 increased 11 points, or 0.28%, to 4,148, and the Nasdaq Composite gained 110 points, or 0.92%, to 12,071.

What’s driving markets

Equity indexes slid sharply on Thursday morning as traders assessed the latest batch of mixed data on the U.S. economy.

See: Wholesale inflation surges in early 2023, PPI shows

After the January consumer-price index showed only slow progress in bringing inflation down, inflation at the wholesale level also rebounded in January. U.S. wholesale prices jumped 0.7% to start the new year, the biggest gain since last summer, offering further proof that inflation is sticky and unlikely to decline rapidly.

A separate measure of wholesale prices that strips out volatile food and energy costs climbed a sharp 0.6% last month, the largest increase in 10 months.

“Today’s wholesale inflation data, when coupled with the CPI report, suggests that the easy battles against price pressures have been won. We believe the move from 9% to 6% [inflation level] will prove to be much less challenging than the journey from 6% to 3%,” wrote John Lynch, chief investment officer at Comerica Wealth Management, in emailed comments.

However, Lynch said the stickier-than-expected inflation means the Federal Reserve is likely to remain steadfast in its fight against inflation, with tighter policy, and for longer, than equity markets have been pricing in since October.

The stronger-than-expected wholesale inflation reading dented U.S. stock indexes and sent yields on the 10-year Treasury note
higher. The ICE U.S. Dollar index, a measure of the currency against a basket of six major rivals, rose 0.2% to 104.11 on Thursday.

In recent sessions traders have absorbed data showing U.S. inflation being stubbornly sticky and strong retail sales. These follow a surprisingly strong jobs report at the start of the month.

“Considering these pricing developments with pressure on profit margins and interest rates, investors should prepare for a retest of the October lows,” Lynch said.

Consequently, benchmark U.S. Treasury yields
are near their highest for 2023, yet the S&P 500 index sits just shy of its best level since August, having bounced 8% for the year to date.

“Are rising rates and yields a sign of normality or looming trouble again? Is U.S. inflation hitting a glitch in its disinflationary journey? Is a soft, hard or no landing more likely now after what we’ve seen so far this year?” asked Jim Reid, strategist at Deutsche Bank.

Stephen Innes, managing partner at SPI Asset Management, expressed similar exasperation: “This is a market that constantly asks different questions at different prices and on different days, and of course, there is no shortage of different answers.”

An indication of just how relaxed investors have become about the current market scenario can be seen in the level of the CBOE VIX index
A measure of expected S&P 500 volatility, the VIX, which tends to jump when traders get anxious, is hovering near 18, below its long run average of 20.

Part of the reason for the declining VIX is that the S&P 500 has been meandering in a relatively tight range for the last 10 sessions, noted Mark Newton, head of technical strategy at Fundstrat.

“U.S. equity markets are holding up far better than might be expected with Treasury yields pressing higher. This will be something to continue to watch carefully,” he said in a note to clients.

“There remains a realistic threat of minor weakness into late February, and this would be officially underway on SPX break of 4060 (though even weakness under 4095 would warn of this possibly getting underway). Conversely, 4160 and also 4176 are the two areas to monitor on the upside,” Newton added.

In other economic data, construction on new U.S. homes fell a seasonally adjusted 4.5% in January to 1.31 million, the Commerce Department said Thursday. The drop in construction on homes follows the decline in December, when housing starts also fell by 3.4%.

The number of Americans who applied for unemployment benefits in stayed below 200,000 for the fifth week in a row, signaling the U.S. labor market is still quite strong. New applications slipped from to 194,000 from a revised 195,000 in the prior week, the government said Thursday.

Companies in focus
  • Cisco Systems
    stock rose 6.2% on Thursday after the networking equipment manufacturer beat expectations for revenue growth in the holiday quarter, and executives predicted stronger growth in a revised annual forecast that sent shares more than 3% higher in after-hours trading Wednesday.

  • Roku
    gained 13.3% after the digital media player manufacturer reported consumers streamed more content than expected through Roku Inc.’s platform in the fourth quarter, helping to drive a sizable revenue beat despite macroeconomic pressures.

  • Paramount Global
    fell 2.9% after the media giant fell a bit shy of revenue expectations for its latest quarter while also recording a loss. 

  • Shopify
    fell 15.4% after the online retailer produced a better holiday quarter than expected according to a Wednesday earnings report, but a forecast for slowing revenue growth hit the stock in after-hours trading.

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