U.S. stocks retreat, with Dow falling lower as lift from softer-than-expected inflation reading fades

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MARKET SNAPSHOT

U.S. stocks were heading lower as they neared the closing bell on 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.

What’s happening

  • The Dow Jones Industrial Average dropped 328.87 points, or 0.9%, to 34,540.76.
  • The S&P 500 declined 30.27 points, or 0.7%, to 4,438.46.
  • The Nasdaq Composite fell 89.24 points, or 0.6%, to 15,016.34.

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 15105.

What’s driving markets

Investors are digesting 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 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 is likely 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 he believes the stock market will 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, analyst at ThinkMarkets, also expects that the Fed is still 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 had 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 are still 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.”

What companies are in focus?

How are other assets trading?

  • The yield on the 10-year Treasury note fell 4.7 basis points to 1.276%. Yields and debt prices move in opposite directions.
  • The ICE U.S. Dollar Index a measure of the currency against a basket of six major rivals, was little changed.
  • Oil futures were little changed, with the U.S. benchmark rising by a penny to settle $70.46 a barrel. Gold futures rose 0.7% to settle at $1,807.10 an ounce.
  • In European equities, the Stoxx Europe 600 closed about flat, dipping less than 0.1%, while London’s FTSE 100 slipped 0.5%.
  • Chinese stocks continued to come under pressure, with the Shanghai Composite falling 1.4% and the Hang Seng dropping 1.2%. Analysts continue to focus on the declining fortunes of property giant China Evergrande and a key slate of economics data is due on Wednesday.

—Steve Goldstein contributed to this report

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