US stocks drop toward their worst day since June as inflation worsens

NEW YORK (AP) — Worries about worsening inflation are dragging the U.S. stock market toward its worst day since June.

The S&P 500 dropped 1.3% Wednesday and was on track for a fifth loss in the six days since setting its all-time high. The Dow Jones Industrial Average was down 218 points, or 0.4%, as of 2:15 p.m. Eastern time, and the Nasdaq composite was 1.9% lower.

Stocks felt pressure from rising yields in the bond market, where worries grew after a report said U.S. consumers had to pay prices for fuel, food and other costs of living last month that were 3.7% higher overall than a year earlier. That means inflation accelerated from its 3.4% rate in August and was worse than the 3.6% that economists expected.

Inflation has remained more painful than anyone would like since the economy catapulted out of the crevasse created by the COVID-19 pandemic. It’s accelerated recently in part because of jumps in fuel prices caused by the war with Iran, and the price for a barrel of Brent crude added 0.8% Wednesday to $106.50.

That has layered on top of signals that the U.S. economy is still growing, longstanding worries about fast-rising debt loads for governments and other factors to send yields to their highest levels in years or even decades in bond markets worldwide.

The centerpiece of the U.S. bond market, the 10-year Treasury, saw its yield briefly jump above 5.32% from less than 5.17% just before the inflation report’s release. It eventually gave back most of the gain.

Yields on shorter-term Treasurys had even bigger leaps as traders raised their expectations for coming hikes to interest rates by the Federal Reserve, though they also moderated as the day progressed.

The Fed last month raised the interest rate that it controls, which affects very short-term loans, for the first time in three years in hopes of reining in inflation. Higher rates do that by making it more expensive for everyone to borrow money and slowing the overall economy.

Traders now see a 37% chance the Fed will raise the federal funds rate at its next meeting in two weeks, up from the 22% probability seen just a day earlier, according to data from CME Group.

“The consumer price index was a little hotter than expected, but not scorching hot,” said Brian Jacobsen, chief economic strategist at Annex Wealth Management. “It was just hot enough to keep traders on edge.”

Part of what’s keeping inflation high is that Americans overall are continuing to spend, which encourages businesses to keep raising prices for their products and services. As Americans become more “price-sensitive” and the economy also benefits from greater productivity by workers, Vanguard Senior Economist Adam Schickling said inflation should slow, but “patience will be required.”

Higher yields in the bond market push downward on prices for stocks, and the main way companies can offset that is by delivering bigger profits. That’s exactly what analysts are expecting, and it’s how the S&P 500 has been able to set records despite the many challenges weighing on Wall Street.

But the high expectations also mean companies will likely get punished if they fall short of targets for growth, which is what several financial companies did Wednesday morning.

Bank of America dropped 6% after reporting weaker profit and revenue for the summer than analysts expected. The profit would have failed to meet expectations even if the U.S. Treasury Department had not announced $1.2 billion in fines late Tuesday for alleged violations of anti-money laundering and sanctions laws by the bank.

State Street sank 6.6% after reporting weaker revenue for the latest quarter than analysts expected, even though its profit was slightly above their forecasts.

Smaller companies can feel the bite of higher borrowing costs in particular because of the need for many to borrow to grow. The Russell 2000 index of the smallest U.S. stocks fell a market-leading 2.1%.

More expensive borrowing costs could also make it more difficult for companies to raise the cash needed to build data centers and fill them with chips for artificial-intelligence technology.

Several AI-related stocks were among the market’s heaviest weights on Wednesday, including drops of 3.4% for Nvidia, 3.3% for Broadcom and 5.3% for Advanced Micro Devices. GE Vernova, which is hoping to electrify power-hungry data centers, dropped 8%.

In stock markets abroad, indexes ticked higher in Europe following a weaker finish in Asia. Indexes rose 0.7% in London and fell 0.9% in Shanghai for two of the world’s bigger moves.