Dow, NASDAQ erase gains as Fed officials hint faster tightening amid high inflation

On Tuesday, Wall Street reversed previous gains as the Federal Reserve’s expected monetary tightening dragged growth stocks back into negative territory. Early in the afternoon, all three main U.S. stock indexes turned negative, driven down by healthcare and financials. The reversal began in earnest immediately after statements by Fed Governor Lael Brainard, who emphasised the need for the central bank to “expeditiously” address decades-long high inflation.

“The Fed members’ statements have been more hawkish than the markets expected,” said Paul Nolte, portfolio manager at Kingsview Asset Management in Chicago. “(Brainard) has been mostly unremarkable, but suddenly she’s stronger in her criticism, and that’s making people sit up and pay attention.”

According to the Labor Department’s CPI report, the prices paid by urban American consumers for a basket of items increased by the most in a month since September 2005, with an annual increase of 8.5 percent, the highest year-on-year inflation rate in more than four decades. The 18.3 percent monthly increase in gasoline prices, to a record high of $4.33 per gallon, accounted for a large portion of the top line CPI spike.

The news did nothing to change expectations about the Federal Reserve’s anticipated interest rate rises. “It’s a reiteration that the Fed can’t sit back here,” Nolte added. “They need to begin going as soon as possible.” The figure below depicts core CPI, which excludes volatile food and energy costs, as well as other significant indices, all of which continue to fly well beyond the Fed’s average annual inflation target of 2%:

Early session gains were also hampered by a disappointing $34 billion 10-year Treasury auction, which helped benchmark rates rebound from session lows. The Dow Jones Industrial Average sank 87.72 points, or 0.26 percent, to 34,220.36, the S&P 500 dropped 15.08 points, or 0.34 percent, to 4,397.45, and the Nasdaq Composite slid 40.38 points, or 0.3 percent, to 13,371.57.

Energy stocks gained the most percentage points of any of the S&P 500’s 11 major sectors, rising 1.7 percent on the strength of rising oil prices. The first-quarter earnings season kicks up later this week, with huge banks leading the way. Analysts have reduced their expectations for the first quarter. Annual profits growth for the S&P 500 was recently expected to be 6.1 percent, down from 7.5 percent at the start of the year.

Crowd Strike Holdings Inc gained 3.2 percent after Goldman Sachs upgraded the cyber security firm’s stock to “buy,” citing increased demand. On the NYSE, decliners outweighed advancers by a 1.07-to-1 ratio; on the NASDAQ, decliners outpaced advancers by a 1.26-to-1 ratio. The S&P 500 set 24 new 52-week highs and 15 new lows, while the Nasdaq Composite set 53 new highs and 246 new lows. Volume on U.S. exchanges was 11.25 billion shares, compared to a 20-day average of 12.60 billion.