Dow drops as hot inflation data fuels rate-hike worries

Wall Street closed well down on Friday, dragging all three main stock indexes to their biggest weekly drop of 2023, as investors braced for the possibility of more aggressive rate hikes from the Federal Reserve as economic data pointed to resilient consumers.

All three indexes posted weekly declines of around 3%, with the blue-chip Dow Jones Industrial Average posting its biggest weekly decline in five months.

The Dow plunged 336.86 points, or 1%, to 32,817.05, the Nasdaq slid 1.7% and the S&P 500 was down 1.1%.

After a strong January, stocks have retreated this month as a slew of economic data amplified worries that the central bank might have to keep rates higher for longer.

The personal consumption expenditures price index, the Fed’s preferred gauge of inflation, shot up 0.6% last month after gaining 0.2% in December.

In the 12 months through January, the PCE index accelerated 5.4% after rising 5.3% in December.

After a strong January, markets have retreated as a slew of economic data fed into worries that the central bank might have to extend higher interest rates.

“The headline and core PCE numbers were well above expectations. What worries us most is that the data since the last Fed meeting has been extremely strong,” said Gene Goldman, chief investment officer at Cetera Investment Management.

“If the Fed had this data at the last meeting they probably would’ve raised by 50 bps and the tone from the press conference would’ve been a lot different.”

Consumer spending, which accounts for more than two-thirds of US economic activity, jumped 1.8% last month, the Commerce Department said. Economists polled by Reuters had forecast a 1.3% growth.

Traders of futures tied to the Fed’s policy rate added to bets that the central bank will raise rates at least three more times this year, with the peak rate seen in the range of 5.25%-5.5% by June.

Cleveland Fed President Loretta Mester said the Fed should raise interest rates higher than necessary if need be to get inflation fully under control.

Megacap stocks including Tesla, Amazon and Nvidia slid in the range of 1.6% and 2.6% as the yield on the benchmark US 10-year Treasury notes rose. 

Separately, January home sales data and the University of Michigan’s final reading of consumer sentiment for February are due later in the day.

Boeing slid 4.8% after the Federal Aviation Administration said the planemaker temporarily halted deliveries of its 787 Dreamliner jets.

Warner Bros Discovery fell 1.1% after reporting a greater-than-expected quarterly loss due to one-off charges related to Warner Bros-Discovery merger.

Block rose 4.3% after the payments firm said it is slowing the pace of hiring this year to control costs and gave an upbeat forecast for a key profit metric.

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