The S&P 500 fell sharply in early trading, and the tech-heavy Nasdaq 100 sank more than 3% as yield-sensitive stocks bore the brunt of selling.
Bond prices also fell sharply, sending their yields higher, after the consumer price index (CPI) report showed inflation decelerated to 8.3% in August on a year-on-year basis, instead of the 8.1% economists expected.
At 9:46 am ET, the Dow Jones Industrial Average was down 606.02 points, or 1.87%, at 31,775.32, the S&P 500 was down 94.40 points, or 2.30%, at 4,016.01, and the Nasdaq Composite was down 376.36 points, or 3.07%, at 11,890.06.
All of the 11 S&P sectors declined in early trading, led by a 3.3% slump in the communication services sector. The small cap Russell 2000 index dropped 2.5%.
The S&P 500 growth stocks index, which houses rate-sensitive technology and growth stocks, fell 3% as Treasury yields rose, while its value counterpart lost 1.6%.
Mega-cap technology stocks
Mega-cap technology stocks such as Apple and Microsoft Corp fell over 2.3% each, while Tesla, Alphabet, Amazon.com and Meta Platforms dropped between 2.7% and 5.6% to weigh the most on the S&P 500 and the Nasdaq.
The Labor Department's CPI report showed monthly CPI gained 0.1% in August from July, against expectation of a 0.1% dip.
Excluding the volatile food and energy components, core CPI increased to 6.3% from 5.9% in July, putting further pressure on the Fed to continue on its rate-hike spree.
“The US inflation in August rose higher at 8.3% y-o-y against expectation of 8.1%. The CPI index increased 0.1% month on month while the economists were expecting it to decline by 0.1% over the month due to sharp correction in energy prices. However, decline in energy prices was offset by higher cost of food (+0.8% m/m) and shelter costs (+0.7% m/m). High costs of food, housing, transportation and other services reiterate the strong consumer demand and elevated service sector price pressures. With inflation being ‘stickier’ than expected, it is highly likely that the Fed will go for another jumbo rate hike of 75bps in its next FOMC meeting on 21st September," said Ritika Chhabra, Economist and Quant Analyst at Prabhudas Lilladher.
Doug Fincher, portfolio manager at Ionic Capital Management, said, "The longer term view is pretty clear here, that monetary policy is a very blunt instrument and anybody that thought inflation would start to roll over just because the Fed hiked a couple times is pretty ignorant to the way economics works."
Policymakers on raising rates
Policymakers last week emphasized their determination to keep raising rates until there is a sustained drop in inflation, which has been running at 40-year highs and above the Federal Reserve's target of 2%.
Rates traders are now betting that the Fed will lift its benchmark rate by at least three-quarters of a percentage point next week, with some chatter that the increase might need to be even bigger than that after consumer-price inflation data came in hotter than expected.
Money markets now see an 81% chance of a 75-basis-point increase in rates and 19% chance of a whopping 100 bps hike by the Fed at its 20-21 September meeting, while expecting rates to peak around 4.28% in March 2023.
The dollar, which has risen sharply this year in part due to expectations of aggressive rate hikes by the Fed, erased early morning losses to climb 1%.
The gap between yields on the two- and 10-year notes , often seen as an indicator of a looming recession, inverted further. Rate-sensitive bank stocks dropped 2%.
Dow, S&P 500, and Nasdaq Composite had rallied recently as investors took advantage of a sharp drop in stock prices since mid-August that was triggered by concerns over soaring inflation and the impact of tighter monetary policy to curb it.
Eastman Chemical slid 5% after the company forecast a downbeat third-quarter profit, citing demand slowdown in consumer durables market, higher costs and a hit from a stronger dollar.
The CBOE volatility index, also known as Wall Street's fear gauge, rose to 24.97 points.
Declining issues outnumbered advancers for a 11.92-to-1 ratio on the NYSE and a 6.29-to-1 ratio on the Nasdaq.
The S&P index recorded no new 52-week high and no new low, while the Nasdaq recorded 9 new highs and 62 new lows.
