Dow falls 400 points after weak economic data, hawkish Fed remarks ease inflation cheer

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U.S. stock indexes traded sharply lower on Wednesday afternoon, after falling retail sales in the holiday shopping season raised concerns that consumer spending and the economy are losing momentum under the Federal Reserve’s tightening cycle.

How are stock indexes trading

  • The S&P 500 was off 38 points, or 1% to around 3,952
  • The Dow Jones Industrial Average fell 399 points, or 1.2% to 33,4511
  • The Nasdaq Composite lost 77 points, or 0.7% to 11,015

On Tuesday, the Dow Jones Industrial Average fell 392 points, or 1.14%, to 33911, the S&P 500 declined 8 points, or 0.2%, to 3991, and the Nasdaq Composite gained 16 points, or 0.14%, to 11095.

What’s driving markets

U.S. data on Wednesday showed that wholesale prices slid 0.5% in December, the biggest decline since April 2020, when coronavirus pandemic began. It adds to the evidence that inflation, though still high, has started to ease.

Meanwhile, December retail sales dropped 1.1%, contracting for the second month in a row. Economists polled by the Wall Street Journal forecasted a decline of 1%.

“You’re seeing the continued effect of the rise in the federal funds rate,” said Dryden Pence, chief investment officer at Pence Capital Management. “September’s rise (in federal funds rate) is now beginning to show up and then you’ll begin to see a November’s rise show up over the next couple of months,” Pence told MarketWatch in a phone interview.

U.S. stocks opened modestly higher on Wednesday, later losing momentum to trade deep in the red as the positive start to the new year started to show signs of fading. The S&P 500 index is up 3.95% so far this year on hopes easing inflation will allow the Federal Reserve to be less aggressive in its monetary tightening cycle, making an economic hard landing less likely and thus supporting company earnings.

“The sentiment is still negative, and I think today is just about some profit-taking of a pretty strong few weeks to start the year, because you’ve got a nice little run,” said Jimmy Lee, founder and CEO of Wealth Consulting Group. “But I think the trend now is shifting from being so negative to getting closer to more neutral.”

Some Fed officials have reiterated their determination to bring inflation down through more interest rate hikes. St. Louis Fed President James Bullard said Wednesday that the Federal Reserve should not “stall” on raising its benchmark rates until they are above 5%.

The Fed’s Beige Book of updates on regional economic conditions is expected to be published at 2 p.m. and Philadelphia Fed President Patrick Harker will be speaking at 3:15 p.m. followed by Dallas Fed President Lorie Logan making comments at 5 p.m.. All times Eastern.

“The Fed has hit the equivalent of a monetary policy trifecta with the combination of slowing wage growth and moderating consumer and producer price inflation in recent periods,” said Peter Essele, Head of Portfolio Management, Commonwealth Financial Network. “The continued moderation in prices means additional rate hikes in the second half of 2023 are off the table at this point, which suggests the bond party will commence.”

Investors are also focusing on the next batch of U.S. fourth-quarter corporate earnings reports.

U.S. companies reporting on Wednesday include Charles Schwab Prologis PNC Kinder Morgan Discover and Alcoa

So far, with 33 of the S&P 500 having reported, 67% of those have beaten profit forecasts, according to Refinitiv. However, high profile disappointments, from the likes of Goldman Sachs on Tuesday, are making it difficult for the S&P 500 to move decisively above the 4,000 level.

In other U.S. economic data, U.S. industrial production fell 0.7% in December in the biggest monthly decline since September 2021.

The National Association of Home Builders’ (NAHB) monthly confidence index rose 4 points to 35 in January, the trade group said on Wednesday.

Companies in focus

  • United Airlines declined 2.6% though it reported quarterly earnings that beat Wall Street’s estimates for the fourth quarter, saying it managed well the severe winter-weather disruptions in late December, and offered an optimistic view of the current quarter and guidance for full-year 2023.
  • Microsoft Corp. shares went down 1.4% Wednesday after reports said Tuesday that the company is preparing chop thousands of jobs in engineering and human resources.
  • Moderna Inc. gained 3% after the drugmaker said an experimental vaccine significantly reduced the risk of a viral respiratory disease among older adults in a large clinical trial.
  • J.B. Hunt Transport Services Inc.  shares rose 4% Wednesday after the company said it would pay out more than $8.8 million in “appreciation bonuses” to full-time drivers and full-time hourly maintenance and office workers.
  • Coinbase Global shares lost 4% Wednesday after that the company announced it will cease operations in Japan, citing unstable “market conditions” in a blog post.
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