Wall St ends sharply lower as hot inflation sparks sell-off

By Johann M Cherian, Ankika Biswas and Carolina Mandl

(Reuters) -Wall Street’s main indexes tumbled on Tuesday after a higher-than-expected consumer inflation reading pushed back market expectations of imminent interest rate cuts, driving U.S. Treasury yields higher.

The Dow Jones Industrial Average posted its biggest one-day percentage drop in nearly 11 months, after a Labor Department report showed U.S. consumer prices increased above forecasts in January amid a surge in the cost of shelter.

“Equities are in retreat mode following a still inflationary CPI report,” said Terry Sandven, chief equity strategist at U.S. Bank Wealth Management. “The higher for longer inflation is a setback for the Federal Reserve.”

Markets have rallied this year on bets that the Fed would start trimming rates in May. The S&P 500 closed above 5,000 for the first time on Friday. The Dow is also trading near a record-high level, and on Monday the Nasdaq briefly surpassed its record closing high from November 2021.

After the release of the inflation data, bets by traders for a rate reduction in May of at least 25 basis points dropped to 36.1%, from about 58% before the data, while expectations for June stood at 74.3%, the CME FedWatch tool showed.

Rate-sensitive megacaps like Microsoft, Alphabet, Amazon.com and Meta Platforms fell between 1.6% and 2.2%, as yields on U.S. Treasury notes across the board spiked to two-month highs. [US/]

Most chip stocks such as Micron Technology, Qualcomm and Broadcom also dropped, sending the Philadelphia SE Semiconductor index down 2%.

Real estate, consumer discretionary and utilities led losses among the 11 major S&P 500 sector indexes, with real estate falling to a low of more than two months.

The small-cap Russell 2000 index also fell 4.3%, the biggest one-day drop since June 16, 2022.

“Many Federal Reserve governors have come out in the last couple of weeks and given various indications that the cuts expected by the market in the first half of the year may have been premature. Now the CPI data are certainly reaffirming that picture,” said Bob Elliott, chief investment officer at Unlimited Funds.

The latest data comes on the heels of a modest revision to inflation in the last quarter of 2023 that left investors briefly relieved on the trajectory of inflation.

The Cboe volatility index, a market fear gauge, hit its highest level since November.

The S&P 500 lost 68.14 points, or 1.37%, to end at 4,953.70 points, while the Nasdaq Composite lost 282.64 points, or 1.79%, to 15,659.91. The Dow Jones Industrial Average fell 522.05 points, or 1.36%, to 38,275.33.

It marked Dow’s biggest one-day percentage loss since March 22, 2023.

Among top movers, JetBlue Airways soared 21.6% after activist investor Carl Icahn reported a 9.91% stake, adding that the carrier’s stock is “undervalued.”

Arista Networks shares fell 5.5% after the cloud solutions provider forecast current-quarter adjusted gross margin below expectations, while Marriott International lost ground after the hotel operator forecast annual profit below Street expectations.

Shares of software firm Cadence Design Systems dropped 4% following a bleak quarterly sales forecast, while toymaker Hasbro lost after a steeper-than-expected drop in holiday-quarter sales and profit.

Tripadvisor stock jumped 13.8% as the online travel agency formed a special committee to evaluate deal proposals.

Declining issues outnumbered advancers by a 10-to-1 ratio on the NYSE and a 4.9-to-1 ratio on the Nasdaq.

On U.S. exchanges 12.9 billion shares changed hands compared with the 11.71 billion moving average for the last 20 sessions.

(Reporting by Carolina Mandl in New York and Johann M Cherian and Ankika Biswas in BengaluruAdditional reporting by Medha Singh Editing by Maju Samuel and Matthew Lewis)