Stocks finished sharply lower Friday, setting up the worst weekly decline on Wall Street since January, as investors picked through details of a crucial reading of May inflation that has accelerated bets on steeper rate hikes from the Federal Reserve.
Stocks extended declines, as well, after consumer sentiment data from the University of Michigan showed confidence levels falling to a record low in June.
The Dow Jones Industrial Average finished down 880 points, or 2.73%, to 31,392, while the S&P 500 lost 2.9%. and the tech-focused Nasdaq dropped 3.52%.
On inflation, the headline consumer price index for the month of May was estimated to have risen 8.6% from last year, up from the 8.3% pace recorded in April and well ahead of the Street consensus forecast of 8.3%. The May reading was the fastest since December of 1981.
So-called core inflation, which strips-out volatile components such as food and energy prices, rose 0.6% on the month, and 6% on the year, the report noted, with the both the annual and monthly reading coming in ahead of the Street consensus forecast.
Record high gasoline prices, which nudged closer to the $5 a gallon mark last night, according to data from AAA, will continue to drive headline inflation rates as crude oil holds firmly above the $120 per barrel mark, while food prices extend their recent run-up amid transport snarls and uneven planting seasons.
Moderating wage growth, however, and easier year-on-year price comparisons for items such as used cars will help mitigate gains in core inflation, as jobless claims creep higher and firms pause hiring plans amid the broader economic uncertainty.
The competing data not only provides details as to the pressures faced by American consumers -- whose spending drives around two-thirds of the world's biggest economy -- but also the near-term reaction of the Federal Reserve, which is tasked with brining inflation back closer to its preferred 2% target with rate hikes and liquidity pullbacks.
And while a 50 basis point rate hike from the Fed next week is a virtual lock, the CME Group's FedWatch tool now suggests an 45.8% chance of a 75 basis point rate hike in July, up from just 10% a month ago.
"Next week’s FOMC meeting will be especially important as markets wait to hear how the Fed expects to combat costs that are rising beyond what the average economist predicted, but what the average U.S. consumer sees every single day," said Quincy Krosby, chief equity strategist at LPL Financial in Charlottesville, Virginia.
"Clearly more rate hikes are coming but will the Fed bring 75 basis points on to the table for discussion?," he added.
Part of that discussion is linked to the European Central Bank's recent hawkishness, and bets that Christine Lagarde and her colleagues will lift rates this summer, with more hikes in the fall, as inflation hits record highs in the single-currency area.
Growth prospects are also in focus as a result of the inflation surge, and while Treasury Secretary Janet Yellen told a New York Times 'Deal Book' event last night that there is "nothing to suggest that a recession is in the works", the U.S. economy did contract sharply over the first quarter and is now only expanding at a 0.9% clip, according to the Atlanta Fed's GDPNow forecasting tool.
Benchmark 10-year Treasury bond yields rose 10 basis points to 3.154% following the inflation data release, while 2-year notes soared to 3.06% for the first time since 2008. The dollar index rose 0.9% against a basket of six global currencies to 104.18.
With all that at play, European and Asian stocks were notably heavy Friday, although data from China showing a 14-month low in the country's producer price index offered some relief for world shares.
Still, the region-wide Stoxx 600 was marked 2.7% lower by the close of trading in Frankfurt, following on from a 0.88% slide for Asia's MSCI ex-Japan benchmark.
DocuSign (DOCU) shares crashed 24.5% after the after the online signature vending group posted weaker-than-expected first quarter earnings and forecast muted revenue growth for the remainder of the year.
Netflix (NFLX) shares, meanwhile, slumped 5.1% after analysts at Goldman Sachs lowered their rating and price target on the online streaming company amid surging inflation and heightened competition.
Stitch Fix (SFIX) shares, were also down sharply, falling 18.5% after the online fashion retailer posted weaker-than-expected third quarter sales and unveiled plans to cull around 15% of its staff.
Advanced Micro Devices (AMD) shares moved 4% lower after the chipmaker struck a bullish tone during its annual investor day presentation after getting caught in the broader Nasdaq sell-off.
