Stocks nosedive as brutal June inflation data raises Fed hike fears

The Dow fell more than 200 points Wednesday as investors dumped stocks following the release of a dismal federal data showing inflation surged 9.1% in June.

The Dow Jones Industrial Average sank 208.54 points, or 0.7%, to 30,772.79. The tech-heavy Nasdaq Composite index was down 17.15 points, while the broad-based S&P 500 fell 17.02 points.

The worse-than-expected June inflation data is a troubling sign for investors, many of whom are rebalancing their portfolios to account for the increased likelihood that the Federal Reserve will hike interest rates by a full percentage point later this month in its scramble to bring down prices.

“Inflation is becoming entrenched and this is exactly what investors and central bankers worry about the most,” said Jeffrey Roach, chief economist at LPL Financial. “The Fed will likely hike rates by 75 basis points later this month, especially since the job market is strong enough to support the front-loading of rate hikes.”

US interest rate futures indicate a 72% chance that the Fed will increase its benchmark interest rate by three-quarters of a percentage point for the second consecutive month, according to Reuters. Investors now see a 28% chance of a full-point hike, up from just a 0.2% prior to the release of CPI data.

“Most were expecting a hot headline reading due to food and energy, which we got, but the most disappointing aspect was the uptick in core prices month over month,” said Cliff Hodge, chief investment officer at Cornerstone Wealth.

The core CPI, or the price of goods excluding volatile food and energy prices, was 5.9% in June — a 0.7% spike from the previous month.

“The Fed has no choice but to follow through on a more aggressive path, which raises the probability of recession next year,” Hodge added.

The “eye-popping” inflation numbers prompted a “knee-jerk reaction” from US markets, according to Charlie Ripley, senior investment strategist at Allianz.

“Looking into the data, inflation remains embedded within multiple segments of the economy even when stripping away food and energy prices,” Ripley said. “As a result, the Fed is likely going to send a hawkish message at the July meeting, and it would be a mistake to think that a rate hike less than 75 basis points is in the cards.”

Treasury yields raced higher on the inflation data, with two-year yields rising to 3.1775% and 10-year yields increasing to 3.0525%. The yield curves have reached their deepest point of inversion since 2007 – a development often seen as a sign of an impending recession, according to Bloomberg.

Cryptocurrency also continued their trend of strong correlation with market movements. Bitcoin and other digital tokens have cratered this year in response to economic volatility and Fed policy tightening.

Bitcoin was trading up 0.7% and was hovering at $19,600 as of Wednesday afternoon, according to Coinbase data. Ethereum, another prominent digital currency, was up about 2.8% to $1,075.

The US crude oil benchmark edged up 0.5% to $96.30 per barrel as investors reacted to the increased likelihood of an economic slowdown. Prices settled below the $100 threshold on Tuesday for the first time since April.

The CBOE Volatility Index, known as Wall Street’s “fear gauge,” jumped about 2.75% to 28.04.