Stocks pinned in red after selloff, investors spooked by inflation

Stock futures pointed lower on Wednesday, indicating Wall Street was bracing for a second day of declines, as the fear of rising inflation forced the Dow to its worst one-day decline since February, and amplified new concerns about the rebound from COVID-19. 

With a weekend cyber-attack sharply driving up the cost of gas nationwide — while sparking shortages — investors are growing increasingly restive over inflation. Mounting signs of supply shortages in the face of surging demand threatening to spur a rapid rise in prices. 

Those fears crystallized on Wednesday, after the government reported that headline consumer prices surged by a faster than expected 4.2% last month. Excluding food and energy, prices jumped 0.9 percent in April (SA) and are up 3.0 percent over the year.

The jitters have surfaced as the U.S. economic recovery — hammered by the COVID-19 pandemic — appears to be quickening. A report from the Labor Department on Tuesday showed job openings reached a record high in March, and a separate survey showed a record proportion of small business owners reported job postings that could not be filled last month. 

A system-wide disruption following a cyberattack on a key energy pipeline operator has sent gasoline prices higher, accelerating an already upward-moving trend in energy prices as demand for travel and fuel resurges coming out of the COVID-19 pandemic. The tableau of faster growth and soaring prices complicates the Federal Reserve’s policy of allowing the economy to run hot — and Wall Street’s willingness to take the central bank at its word.

“Regardless of what happens with inflation over the next few months, I believe the Federal Reserve is more focused on the employment part of its dual mandate and will remain accommodative for as long as it takes to ensure the economy returns to full employment,” said Nancy Davis, founder and portfolio manager at Quadratic Capital Management, with roughly $3 billion in assets.

The Fed “has a dual mandate of price stability and maximum employment and I believe the Fed is ready to sacrifice the former to save the latter,” Davis added.

Investors have in turn also been pondering when the Fed might step in and adjust its highly accommodative monetary policies to stave off rising inflation. Many policymakers, however, have remained staunchly of the view that the central bank needs to keep rates low and asset purchases carrying on at their current, aggressive rate to support the economy still emerging from a worldwide health crisis. 

“I don’t think the Fed’s ignoring inflation. What they’re saying is, there will be inflation, however, it’s going to be transitory,” Dana Peterson, chief economist for The Conference Board, told Yahoo Finance. “So where are we seeing inflation? We’re seeing it in producer prices, consumer prices and also in asset prices. Looking at producer prices, prices for lumber, chips, corn, all those commodity prices and inputs … those prices are rising, and that’s a function of supply chain disruptions as well as very strong demand for those items.”

“Consumer prices for services are probably going to pick up. We’re already starting to see that for some services like airline tickets, and also restauranteurs are raising prices for that service,” Peterson added. “And we’re also seeing asset prices rise for housing, and up until very recently, certainly the stock market. But the key thing for the Fed is, how much inflation will we see for core consumer inflation measures, and of course how long?”

Meanwhile, other strategists urged investors to stay the course despite this week’s rollercoaster market action. Following the past two days’ worth of declines, the S&P 500 remains higher by 10.5% for the year to date, though the tech-heavy Nasdaq’s rise has been cut to 3.9%. 

“I think it’s really important to keep this volatility in context. Over the last 30 days, we saw one pullback greater than 1% in the S&P 500,” JPMorgan Private Bank’s Clinton Warren told Yahoo Finance. “If you compare this to the volatility that we saw late last first quarter, this is nothing. Markets are still up over 10% year to date. So yes there’s volatility, there’s going to be more volatility this year, but if you just take a step back and put it into context, there’re way more things to be excited about than the little volatility that we’ve seen these last few days.” 

9:00 a.m. ET: Faster inflation = higher yields, and a stronger dollar

The combined logic of rising prices and the resulting upward pressure on interest rates is likely to yield a stronger dollar. Capital Economics points out that the greenback:

…will strengthen a bit over the next couple of years as the economy in the US outperforms during the recovery from COVID-19 and government bond yields there generally rise faster than those elsewhere. In this environment, we expect the currencies of other economies where recoveries are likely to be swift and central banks relatively quick to begin normalizing policy, broadly in line with market expectations…

According to the firm, that’s good news for key international currencies like the New Zealand’s kiwi, South Korea’s won and the Chilean peso, among others.

8:50 a.m. ET: The biggest surprise in the April CPI…

Used cars in a parking lot.

Used cars in a parking lot.

…was a 10% (!!) surge in used car prices, translating into a staggering annualized gain of nearly 314% (yes, you read that correctly:

“The index for used cars and trucks rose 10.0 percent in April. This was the largest 1-month increase since the series began in 1953, and it accounted for over a third of the seasonally adjusted all items increase.”

8:30 a.m. ET: Futures extend losses after CPI data

Here’s where markets were trading after the numbers:

  • S&P 500 futures (ES=F): 4,133.00, -13.25 (-0.32%)

  • Dow futures (YM=F): 34,081.00, -102.00 (-0.30%)

  • Nasdaq futures (NQ=F): 13,285.25, -60.75 (-0.46%)

8:20 a.m. ET: Wednesday: Stock futures sharply lower

Here’s where markets were trading ahead of the opening bell:

  • S&P 500 futures (ES=F): 4,134.00, -12.25 (-0.30%)

  • Dow futures (YM=F): 34,094.00, -89.00 (-0.26%)

  • Nasdaq futures (NQ=F): 13,279.50, -66.50 (-0.50%)

6:14 p.m. ET Tuesday: Stock futures open mixed

Here’s where markets were trading as the overnight session kicked off: 

  • S&P 500 futures (ES=F): 4,139.75, down 6.5 points or 0.16%

  • Dow futures (YM=F): 34,137.00, down 46 points or 0.13%

  • Nasdaq futures (NQ=F): 13,322.75, down 23.25 points or 0.17%

Trader Frank Masiello talks on his phone on Wall St. outside the New York Stock Exchange (NYSE) in New York, U.S., January 15, 2021. REUTERS/Brendan McDermid

Trader Frank Masiello talks on his phone on Wall St. outside the New York Stock Exchange (NYSE) in New York, U.S., January 15, 2021. REUTERS/Brendan McDermid

Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck

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