Market Snapshot: U.S. stocks end lower, with Dow down nearly 300 points as lift from inflation reprieve fades

U.S. stocks ended lower Tuesday, giving up early gains inspired by a softer-than-expected August inflation reading, as investors fretted that underlying price pressures may still prove persistent.

How did major indexes trade?
  • The Dow Jones Industrial Average
    DJIA,
    -0.84%

    dropped 292.06 points, or 0.8%, to end at 34,577.57.

  • The S&P 500
    SPX,
    -0.57%

    declined 25.68 points, or 0.6%, to finish at 4,443.05.

  • The Nasdaq Composite
    COMP,
    -0.45%

    fell 67.82 points, or 0.5%, closing at 15,037.76.

On Monday, the Dow jumped 262 points, or 0.8%, to end at 34869, ending a five-session losing run. The S&P 500 rose 10 points, or 0.2%, to 4468, while the Nasdaq Composite slipped 10 points, or 0.1%, to 15,105.

What drove markets?

Investors digested fresh inflation data ahead of the Federal Reserve’s policy meeting next week, with stocks falling after initially moving higher on the U.S. government report Tuesday that the rise in the cost of living slowed in August.

The U.S. consumer-price index rose 0.3% in August, while the core reading, which excludes volatile food and energy prices, was up just 0.1%. The CPI increased 5.3% year over year, compared a rise of 5.5% for the year in July. The year-over-year change in core CPI fell back to 4%, from 4.3% in July.

The markets saw an initial “relief rally” on the “little lighter than expected” read on inflation, but the latest CPI data probably won’t change the Fed’s tapering timeline, said Randy Frederick, managing director of trading and derivatives at Charles Schwab, in a phone interview Tuesday. “Whatever they’re leaning towards, I don’t believe today’s numbers were far enough off the mark to change that calculus.”

Frederick, who thinks the jump in inflation during the pandemic likely is temporary, said he still expects the Fed will this year announce a reduction in its monthly bond purchases that it started in 2020 to support markets through the COVID-19 crisis.

The U.S. stock market, which has been trading near all-time highs, is now a bit vulnerable, according to Frederick. He said lowered forecasts for economic and company earnings growth have made some investors “a little uncomfortable in the last week or so,” particularly being between corporate earnings seasons for the second and third quarters.

“There’s more uncomfortable sentiment out there than there are positive catalysts,” said Frederick, though he said expects the stock market to continue to rise higher this year. “We’re about three weeks out from the next earnings season.”

Read: Brace for ‘choppy’ market after Wall Street analysts trim S&P 500 earnings estimates for third quarter

Fawad Razaqzada, an analyst at ThinkMarkets, also expects that the Fed remains likely to announce a plan to begin tapering its bond purchases before the end of the year. He said in a note that the latest inflation reading reflected declines in items such as airfares, accommodation and used cars, which Fed officials already expected to fall back. Meanwhile, worries over more persistent factors driving up price pressures remain.

“The inflation part of the taper test had already been met, and today’s report does not ‘uncheck; that box,” said Aneta Markowska, chief economist at Jefferies, in a note. She said core prices remain well above the 2% path, which more than qualifies as “substantial further progress” under the Fed’s criteria for beginning to scale back its efforts to support the economy.

Earlier, the National Federation of Independent Business said its small-business optimism index rose 0.4 point in August to 100.1. Small-business owners were somewhat more optimistic about the economy, but said record shortages of labor and supplies were cutting into sales and profits.

“We can’t declare victory on inflation,” said Jay Jacobs, head of research and strategy at exchange-traded fund provider Global X, in a phone interview Tuesday. Jacobs said that he has his eye on wage inflation amid labor shortages as well as rent-related prices.

The continued rebound in “rent and owners-equivalent-rent components” within core inflation also has the attention of Rick Rieder, BlackRock’s chief investment officer of global fixed income and head of the firm’s global allocation investment team, according to his emailed statement Tuesday.

“We’re particularly concerned about the possibility of more housing/shelter inflation that could come at a time when many lower-to-middle-income households are still struggling with employment challenges and rising prices in other areas as well,” Rieder wrote. “We think the Fed should adjust monetary policy away from emergency conditions, as these policies are now distorting the economy.”

Which companies were in focus?
How did other assets trade?
  • The yield on the 10-year Treasury note
    TMUBMUSD10Y,
    1.291%

    fell 4.7 basis points to 1.276%. Yields and debt prices move in opposite directions.

  • The ICE U.S. Dollar Index
    DXY,
    -0.02%
    ,
    a measure of the currency against a basket of six major rivals, was about flat with a decline of less 0.1%.

  • Oil futures were little changed, with the U.S. benchmark
    CL00,
    +0.43%

    rising by a penny to settle $70.46 a barrel. Gold futures
    GC00,
    +0.69%

    rose 0.7% to settle at $1,807.10 an ounce.

  • In European equities, the Stoxx Europe 600
    SXXP,
    -0.01%

    closed about flat, dipping less than 0.1%, while London’s FTSE 100
    UKX,
    -0.49%

    slipped 0.5%.

  • Chinese stocks continued to come under pressure, with the Shanghai Composite
    SHCOMP,
    -1.42%

    falling 1.4% and the Hang Seng
    HSI,
    -1.21%

    dropping 1.2%. Analysts continue to focus on the declining fortunes of property giant China Evergrande
    3333,
    -11.87%
    ,
    and a key slate of economics data is due on Wednesday.

—Steve Goldstein contributed to this report

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