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Stocks Slip, Yields Soar on Hottest Inflation in 40 Years

February 10, 2022by Stan Choe, Associated Press
Stocks Slip, Yields Soar on Hottest Inflation in 40 Years
A pedestrian passes the New York Stock Exchange, Monday, Jan. 24, 2022, in New York. (AP Photo/John Minchillo, File)

NEW YORK (AP) — With inflation going only higher, stocks are slipping on Wall Street Thursday as expectations build that the Federal Reserve will have to get more aggressive about removing the tremendous support it’s given the economy.

The hottest inflation reading since 1982 sent the S&P 500 down 0.5% in early trading. It also sent Treasury yields jumping, as traders built up bets the Fed may have to throttle the economy with a bigger-than-usual hike in interest rates next month. The yield on the 10-year Treasury topped 2% for the first time since August 2019.

The Dow Jones Industrial Average was down 93 points, or 0.3%, at 35,674, as of 9:52 a.m. Eastern time. The Nasdaq composite was 0.8% lower, with tech stocks again taking some of the market’s heaviest losses. They tend to get hit harder by expectations for rising rates in part because their prices look more expensive.

Inflation has been building over the last year as the economy roared back from the pandemic. Supply shortages and snags in global supply chains also pushed inflation higher, and prices at the consumer level were up 7.5% last month from a year earlier. That was even hotter than economists expected.

A separate report also said fewer workers filed for unemployment last week than expected. That’s encouraging for workers, but it could add even more upward pressure on inflation.

The strong jobs market and high inflation have forced the Federal Reserve to make a hard pivot, and it’s said it’s ready to begin removing the massive aid it’s poured into financial markets to help the economy. Such moves to raise interest rates could rein in inflation, but they would also put downward pressure on all kinds of investments, from stocks to cryptocurrencies.

Following the inflation report’s release, traders see a better than 50% chance that the Fed will raise short-term interest rates by half a percentage point at its meeting next month, double the traditional move. A day earlier, those same traders saw just a 24% probability of such a big move, according to CME Group. Whatever its size, it would be the first increase since 2018.

Instead of a 0.50 percentage point hike, the inflation report could also push the Fed accelerate its plans for letting go of some of the trillions of dollars of bonds that it bought through the pandemic, said Brian Jacobsen, senior investment strategist at Allspring Global Investments. Such a move would suck money out of financial markets and have a similar effect as additional increases in short-term rates.

In the bond market, yields were jumping most for shorter-term Treasurys. The two-year yield leaped to 1.48% from 1.36% late Wednesday, a notable move. It tends to track expectations for Fed movement.

The 10-year yield also rose, up to 1.98% from 1.93% after earlier topping 2%, but not by as much as the two-year Treasury. It tends to move more on expectations for future inflation and economic growth.

Expectations for higher rates sent tech stocks in the S&P 500 down 1%, the largest loss among the 11 sectors that make up the index. That’s been the usual reaction in the market recently, a mirror image to the preceding years when ultra-low rates helped send tech stocks to the market’s biggest gains.

Amazon and Nvidia both fell more than 1.5% in early trading and were among the heaviest weights on the S&P 500.

Helping to offset the losses were gains for companies that can actually benefit in a world with higher inflation and interest rates. Energy stocks climbed 0.6%, for example, as the price of crude oil continues to climb. Producers of raw materials also rose a similar amount.

The Walt Disney Co. jumped 5.4% after it reported a rebound in theme-park attendance last quarter and that it added more subscribers to its Disney+ streaming service than analysts expected.

In overseas markets, stocks were mixed. Japan’s Nikkei 225 rose 0.4%, and South Korea’s Kospi added 0.1%. In Europe, France’s CAC 40 fell 0.6% and Germany’s DAX was virtually unchanged.

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AP Business Writer Yuri Kageyama contributed.

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