Inflation jitters prompt selling
Heightened fears of inflation sent stocks sliding for a second straight session Tuesday as a key price index climbed to an 11-year high and an improving manufacturing sector raised the likelihood of another interest rate hike by the Federal Reserve. Tech shares and small-caps were hardest hit.
While inflation-adjusted consumer spending rose 0.2 percent in June, the Commerce Department also reported that consumer prices are up 2.4 percent year over year, the highest rate of inflation since April 1995.
A big increase in the Institute for Supply Management’s manufacturing index deepened investors’ interest rate worries, as a strong economy would make it easier for the Fed to raise rates without cutting off growth. The index rose to 54.7 in July, far better than the 53 reading economists had expected.
The Fed meets next Tuesday to gauge whether more interest rate hikes are needed to clamp down on inflation. The Commerce and ISM reports could push policy makers toward another quarter percentage point increase, which would put the benchmark rate at 5.5 percent. That would make capital more expensive for corporations — and hurt corporate earnings and share prices.
“The market is trying to read every tea leaf to gauge where the Fed is going to go, and we have a lot of data out this week,” said Bryan Piskorowski, market analyst at Wachovia Securities. “You’re going to see these kind of movements, up and down, before you get to the Fed meeting.”
The Nasdaq composite index dropped 29.48, or 1.41 percent, to 2,061.99 as investors abandoned tech shares and small-cap issues, perceived to be risker in a rising rate environment.
Other stock indexes also fell. The Dow Jones industrial average fell 59.95, or 0.54 percent, to 11,125.73, and the Standard & Poor’s 500 index lost 5.74, or 0.45 percent, to 1,270.92.
Bonds traded in a narrow range, with the yield on the benchmark 10-year Treasury note steady at 4.98 percent from late Monday. The dollar rose against other major currencies, while gold prices rose.
Rising crude oil and natural gas futures added to Wall Street’s worries, since the Fed has signaled that high energy prices could further feed inflation. Crude prices rose 51 cents to $74.91 per barrel due to multiple crises in the Middle East, while natural gas futures built on Monday’s 14 percent surge based on higher U.S. electrical demand in a nationwide heat wave.
Despite the inflation news, investors seem ready for the Fed to stop raising rates, concerned that more rate hikes would grind the economy to a halt, or even send it into a recession. So news of strength in the economy, like the ISM report, is seen as bad news.
Declining issues outnumbered advancers by more than 3 to 2 on the New York Stock Exchange, where volume came to 1.67 billion shares, compared with 1.62 billion traded Monday.
The Russell 2000 index of smaller companies fell 12.13, or 1.73 percent, to 688.43.
Overseas, Japan’s Nikkei stock average fell 0.1 percent. In Europe, Britain’s FTSE 100 closed down 0.8 percent, France’s CAC-40 lost 1.22 percent for the session, and Germany’s DAX index fell 1.5 percent.