Monday, December 6th, 2021

Dow drops more than 200 points after highest inflation reading in 30 years triggers bond yield spike


Traders work on the floor of the NYSE.

NYSE

Stocks retreated Wednesday after October’s consumer price reading showing the biggest annual jump in more than 30 years, sending investors into hedges against inflation and triggering a spike in bond yields.

As Treasury yields surged, investors dumped high-flying technology stocks and bid up bank stocks. They also sought refuge in gold and bitcoin.

The Dow Jones Industrial Average shed about 220 points, or 0.6%. The S&P 500 ticked down 0.7%. The tech-heavy Nasdaq Composite dropped 1.4%.

The consumer price index jumped 6.2% from a year ago, well above the 5.9% estimate from economists polled by Dow Jones and the largest annual increase since 1990. On a monthly basis, the CPI increased 0.9% against the 0.6% estimate. The CPI is a basket of products ranging from gasoline and health care to groceries and rents.

“Wednesday’s Consumer Price Index showed another month of inflation data well above the Federal Reserve’s inflation target, primarily due to continued supply chain issues and labor shortages. If inflation doesn’t subside, the Federal Reserve may need to taper at a more substantial rate and hike interest rates, which could hurt stocks and bonds,” Nancy Davis, founder of Quadratic Capital Management, said.

Following the CPI data, traders moved up their expectations for when the first Fed rate hike would occur. The Fed funds futures market now sees greater odds of the central bank’s first full rate hike coming in July 2022.

The yield on the benchmark 10-year Treasury, which had trended lower in recent weeks, jumped by nearly 10 basis points Wednesday after the CPI reading. (1 basis point is 0.01 percentage points.) A poor auction in 30-year bonds Wednesday afternoon added steam to the spike.

Technology shares were under pressure as rising rates discount the value of future earnings and therefore can hit growth stocks particularly hard. Advanced Micro Devices pulled back more than 5%, Nvidia retreated more than 3% and Google-parent Alphabet dipped more than 1%.

Meanwhile, bank stocks got a lift from the jump in bond yields, capping losses for the overall market. Higher rates mean banks charge greater interest on loans, which typically boosts profits. Bank of America and Wells Fargo both rose.

Also on the upside, Tesla, the leader of the bull market whose shares have come under pressure recently, added about 2% to cut losses for the week to about 15%. The stock was among the top gainers on the S&P 500 on Wednesday. Electric vehicle makers are in focus Wednesday with Amazon-backed EV startup Rivian going public.

Investors also looked outside of stocks and bonds for inflation hedges. Gold and bitcoin rose as investors sought assets that could hold up better as prices rise.

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