US stocks opened lower on Tuesday after a surprise inflation report showed prices rose more than expected last month.
Shortly after the opening bell, the S&P 500 was down more than 2.1%, the Dow was down 1.8%, while the tech-heavy Nasdaq was down as much as 3.2%.
The Bureau of Labor Statistics released the consumer price index (CPI) for August early Tuesday, which showed prices rose 8.3 percent from a year earlier and 0, 1% compared to the previous month. Economists had predicted an 8.1% increase in inflation compared to last year and a 0.1% decrease compared to the previous month.
That reading marks some moderation in price increases, which hit four-decade highs earlier this year, but this smaller-than-expected drop likely means another 0.75% rate hike from the Federal Reserve at its policy meeting next week.
On a “core” basis, which excludes the more volatile costs of food and energy, prices rose 6.3% from a year ago in August and 0.3% from the previous month. Much of the steady increase in core inflation came from the cost of housing, which rose 0.7% from the month before in August, the most since January 1991. Housing costs they account for about a third of the CPI.
“Headline inflation has peaked, but in a clear sign that the need to continue raising rates is not abating, core CPI is rising again, confirming the very sticky nature of the US inflation problem,” he said Seema Shah, Chief Global Strategist at Principal Global Investors.
After Tuesday’s report, CME Group data showed investors have an 82% chance of a 0.75% rate hike next week and an 18% chance of a rate hike on ‘1%. Last week, these data reflected a 75% to 25% split between a rate increase of 75 basis points and a rate increase of 50 basis points.
Movements along the Treasury curve were also strong on Tuesday, with the 10-year yield climbing around 3.44%, while the 2-year yield rose 15 basis points to 3.72%.
US Federal Reserve Board Chairman Jerome Powell waits for his renomination hearing before the Senate Banking, Housing and Urban Affairs Committee on Capitol Hill in Washington, US, January 11, 2022. Brendan Smialowski /Pool via REUTERS
Elsewhere in the markets Tuesday, Peloton ( PTON ) was in the spotlight following an announcement late Monday that co-founder John Foley was leaving the board, months after Peloton hired former Spotify executive Barry McCarthy as CEO. Shares fell as much as 7% early Tuesday amid a broader selloff in markets.
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Elsewhere, shares of Rent the Runway ( RENT ) fell as much as 30% in early trading Tuesday after the company cut its full-year guidance and unveiled plans to cut 24% of its corporate workforce, citing “potentially tougher macro conditions.”
Over the next few weeks, market action will focus on the Fed and the macro environment, but Q2 earnings season is fast approaching.
“Once we get past this week’s CPI and PPI inflation reports and next week’s FOMC meeting, the next big catalyst for the market will be third quarter earnings,” said Nicholas Colas of DataTrek in a note this week.
According to data from FactSet Research, expectations for S&P 500 earnings growth are at a 3.7% increase for the third quarter, down sharply from expectations for 9.8% growth at the end of June.
Colas notes that analysts have lowered third-quarter earnings expectations over the past 2-3 months for every S&P 500 sector except energy, and that seven of 11 groups are now expected to show a decline total year-over-year gains, compared to just three in the second quarter.
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Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc
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