Dow drops 240 points, Nasdaq falls 1.7% after hot inflation data drives bond yield spike

FAN Editor

Stocks retreated Wednesday after October’s consumer price reading showing the biggest annual jump in more than 30 years, triggering a spike in bond yields.

The Dow Jones Industrial Average shed 240.04 points, or about 0.7%, to close at 36,079.94. The S&P 500 fell 0.8% to 4,646.71. The tech-heavy Nasdaq Composite dropped nearly 1.7% to 15,622.71.

The yield on the benchmark 10-year Treasury, which had trended lower in recent weeks, jumped by about 11 basis points Wednesday after the CPI reading. (1 basis point is 0.01 percentage points.) A poor auction in 30-year bonds that afternoon added steam to the spike.

As Treasury yields surged, investors dumped high-flying technology stocks and bid up bank stocks. They also sought refuge in gold and bitcoin.

“The CPI report today contributed to the weakness,” Liz Ann Sonders, Charles Schwab chief investment strategist, said. “And to some degree, the equity market will key off of the bond market, which has been the case for much of this year.”

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The consumer price index jumped 6.2% from a year ago, well above the 5.9% estimate from economists polled by Dow Jones and the largest annual increase since 1990. On a monthly basis, the CPI increased 0.9% against the 0.6% estimate. The CPI is a basket of products ranging from gasoline and health care to groceries and rents.

“Wednesday’s Consumer Price Index showed another month of inflation data well above the Federal Reserve’s inflation target, primarily due to continued supply chain issues and labor shortages. If inflation doesn’t subside, the Federal Reserve may need to taper at a more substantial rate and hike interest rates, which could hurt stocks and bonds,” Nancy Davis, founder of Quadratic Capital Management, said.

Following the CPI data, traders moved up their expectations for when the first Fed rate hike would occur. The Fed funds futures market now sees greater odds of the central bank’s first full rate hike coming in July 2022.

Technology shares were under pressure Wednesday as rising rates discount the value of future earnings and therefore can hit growth stocks particularly hard. Advanced Micro Devices pulled back about 6.1%, Nvidia retreated 3.9% and Google-parent Alphabet dipped 2%.

Meanwhile, bank stocks got a lift from the jump in bond yields, capping losses for the overall market. Higher rates mean banks charge greater interest on loans, which typically boosts profits. Bank of America ticked up nearly 0.8% and Wells Fargo gained 0.9%.

Investors also looked outside of stocks and bonds for inflation hedges. Gold and bitcoin rose as investors sought assets that could hold up better as prices rise.

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