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S&P 500 Slumps as Surprise Jump in Inflation to Keep Fed on Rate Hike Trail

By Yasin Ebrahim — The S&P 500 fell sharply Friday as data showing inflation unexpectedly hit a fresh 40-year high is expected to keep the Federal Reserve leaning hawkish and scuppered hopes of a rate hike pause later this year.

The S&P 500 fell 2%, the Dow Jones Industrial Average slipped 2%, or 631 points, and the Nasdaq was down 2.7%.

The consumer price index rose 1% in May, above expectations for a 0.7% increase, taking the year-on-year consumer prices through May to 8.6%, its fastest rate since 1981 and above economists’ forecasts of 8.3%.

In a worrying signal for the Fed, the factors pushing inflation above fresh 40-year highs are broadening beyond just supply-chain issues, with shelter, food and gas leading the gains.

“The Federal Reserve is committed to reducing demand to meet a supply-constrained world. This inflation reading will strengthen that resolve,” Yelena Maleyev, economist at Grant Thornton said in a note.        

Treasury yields jumped on bets that the Fed will be forced to deliver 50 basis points at each of the next three meetings, putting growth sectors of the market such as tech, which are vulnerable to rising rates, on the backfoot.

Apple (NASDAQ:AAPL), Meta Platforms (NASDAQ:META) and Microsoft (NASDAQ:MSFT), each down more than 3%, led the losses in big tech.

Consumer discretionary also led the deep slide in the broader market, led by travel and leisure stocks on fears that red-hot inflation will put a further squeeze on consumer spending.

Caesars Entertainment (NASDAQ:CZR), Royal Caribbean (NYSE:RCL), MGM Resorts (NYSE:MGM), and Booking (NASDAQ:BKNG) were among the biggest losers in the sector.

“The pace of consumer spending is going to slow, we’ve already seen that in the choices they are making,” Chief Strategist at Spouting Rock Asset Management Rhys Williams told in an interview on Friday.

“There’s been a few anecdotes that even on services like cruises, demand is down for next year,” Williams added. “People are a little bit shocked by how much things cost.”

Financials were driven lower by banks as the Treasury yield curve continued to flatten on bets of a potential recession ahead.  

Signature Bank (NASDAQ:SBNY), Capital One Financial (NYSE:COF), and Synchrony Financial (NYSE:SYF) slumped with latter, which is sensitive to cryptocurrency also suffering added pressure from a rout in crypto. 

Bitcoin fell more than 2%, while Ethereum fell more than 6% to a 52-week low.    


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