Troubling Inflation Data Contributing To Extended Sell-Off On Wall Street

Stocks have moved sharply lower in morning trading on Friday, extending the sell-off seen over the course of the previous session. The major averages have all shown substantial moves to the downside on the day.

In recent trading, the major averages have fallen to new lows for the session. The Dow is down 808.46 points or 2.5 percent at 31,464.33, the Nasdaq is down 388.96 points or 3.3 percent at 11,365.26 and the S&P 500 is down 112.21 points or 2.8 percent at 3,905.61.

The extended sell-off on Wall Street comes as a Labor Department report showing consumer prices in the U.S. shot up by more than expected in the month of May has led to renewed concerns about the outlook for interest rates.

The Labor Department said its consumer price index jumped by 1.0 percent in May after rising by 0.3 percent in April. Economists had expected consumer prices to increase by 0.7 percent.

With the bigger than expected monthly increase, the annual rate of consumer price growth accelerated to 8.6 percent in May from 8.3 percent in April, showing the biggest surge since December 1981. The annual growth was expected to be unchanged.

Excluding food and energy prices, core consumer prices climbed by 0.6 percent in May, matching the growth seen in the previous month. Core prices were expected to rise by 0.5 percent.

Meanwhile, the annual rate of core consumer price growth slowed to 6.0 percent in May from 6.2 percent in April. Economists had expected the pace of growth to decelerate to 5.9 percent.

The bigger than expected increase in consumer prices is likely to convince the Federal Reserve to follow through on its plans to aggressively raise interest rates in an effort to combat inflation.

The Fed is scheduled to announce its latest monetary policy decision next Wednesday, with the central bank widely expected to raise interest rates by another 50 basis points.

Michael Pearce, Senior U.S. Economist at Capital Economics, said the inflation data raises the possibility the Fed could increase rates by 75 basis points next week.

“The bigger increases in core prices a year ago meant that core inflation still edged down to 6.0% from 6.2%, but there is very little in the details of this report to suggest that inflationary pressures are easing,” Pearce said.

He added, “Together with the continued strength of the latest activity data, that bolsters the argument of the hawks at the Fed to continue the series of 50bp rate hikes into September and beyond, or even to step up the size of rate hikes at coming meetings.

A separate report released by the University of Michigan showed consumer sentiment in the U.S. has tumbled to its lowest level on record in the month of June.

The preliminary data showed the consumer sentiment index plunged to 50.2 in June from 58.4 in May. Economists had expected the index to edge down to 58.0.

“Consumer sentiment declined by 14% from May, continuing a downward trend over the last year and reaching its lowest recorded value, comparable to the trough reached in the middle of the 1980 recession,” said Surveys of Consumers Director Joanne Hsu.

Retail stocks are turning in some of the market’s worst performances on the day, resulting in a 3.6 percent nosedive by the Dow Jones U.S. Retail Index.

Substantial weakness is also visible among financial stocks, with the NYSE Arca Broker/Dealer Index and the KBW Bank Index both plunging by 3.5 percent.

Housing stocks have also shown a substantial move to the downside, dragging the Philadelphia Housing Sector Index down by 3.4 percent.

Chemical, semiconductor, steel and airline stocks are also seeing considerable weakness amid broad based selling pressure on Wall Street.

In overseas trading, stock markets across the Asia-Pacific region moved mostly lower during trading on Friday. Japan’s Nikkei 225 Index slumped by 1.5 percent, while Hong Kong’s Hang Seng Index fell by 0.3 percent.

The major European markets have also shown significant moves to the downside on the day. While the German DAX Index has plunged by 3.1 percent, the French CAC 40 Index is down by 2.8 percent and the U.K.’s FTSE 100 Index is down by 2.4 percent.

In the bond market, treasuries have come under pressure after seeing early volatility. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, is up by 6.3 basis points at 3.107 percent.

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