Dow Jones, S&P 500, Nasdaq fall as Fed's preferred inflation measure comes in hot

9.45am: Fed’s rate hikes expected to continue

Stocks started the day firmly in the red after hotter-than-expected inflation data this morning was yet another sign that price pressures remain sticky in the US.

Shortly after the market opened, the Dow Jones Industrial Average had shed 367 points or 1.1% at 32,815 points, the S&P 500 was down 52 points or 1.3% at 3,966 points, and the Nasdaq Composite had lost 212 points or 1.7% at 11,995 points.

ING chief international economist James Knightley said the acceleration in the Fed’s favored measure of inflation, the core personal PCE deflator, was a big story, and it would ensure that the Fed mantra of ongoing hikes continues with 25 basis point moves in March, May, and June fully priced by markets.

“We agree that this is the most likely path ahead, but it will be painful for the household sector, coming at a time when real incomes are squeezed by inflation, borrowing costs continue to rise and lending conditions are tightening,” he said.

Knightley noted that talk of a potential 50 basis point move at the March Federal Open Market Committee meeting can’t be completely discounted, although he does not think the Fed will carry through with it.  

8.50am: Inflation data comes in hot

US stock futures sank in pre-market trading after the latest Personal Consumption Expenditures (PCE) price index data, the Fed’s preferred measure of inflation, came in hotter than expected.

The headline PCE price index increased 0.6% month-over-month in January and 5.4% for the past 12 months, above the consensus expectation of an annualized increase of 4.9% and up from December’s annualized reading of 5%.

The core PCE price index, which excludes food and energy, also increased 0.6% month-over-month and 4.7% from a year ago. Again, this came in higher than the expected annualized rise of 4.3%, and up from 4.4% in December. 

Titian Asset Management chief investment officer John Leiper commented: “The market pricing heading into today’s PCE inflation and personal spending data suggested a high print on both counts, and that’s exactly what we got.”

“This should extend the recent risk-off price action as equities play catch-up with bonds and the rising stagflationary reality,” Leiper said.

Shortly after the release of the data, futures for the Dow Jones Industrial Average were down 1%, the S&P 500 was down 1.1%, and the Nasdaq Composite was down 1.5% in pre-market trading.

6.30am: Inflation back on the agenda 

Wall Street is expected to open lower as the week draws to a close, with attention shifting to the release of January’s Personal Consumption Expenditures (PCE) price index, the Federal Reserve’s preferred inflation measure, for further proof of slowing inflation in the US economy.  

Futures for the Dow Jones Industrial Average (DJIA) fell 0.4% in Friday pre-market trading, while those for the broader S&P 500 index declined 0.6%, and contracts for the Nasdaq-100 shed 0.9%.

Following a volatile session, the DJIA ended Thursday 0.3% higher at 33,154 and the Nasdaq Composite added 0.7% to 11,590. The S&P 500 improved by 0.5% to 4,012, although it is still on track for its worst weekly performance since December.

One year on from Russia’s invasion of Ukraine and three years to the day since the first big COVID-19-related sell-off of risk assets, the aftershocks are still being felt every day in markets, commented Deutsche Bank strategist Jim Reid, 

“This has continued this week, with intraday volatility remaining high. Risk assets whipsawed yesterday, with the S&P 500 up nearly +1% in early trading before selling off -1.5% in the late US morning following further upward revisions to inflation data in the US and Europe,” Reid said. “However that marked the high in yields for the day and a fixed income rally back lifted tech stocks, and in the end, the S&P broke a four-day losing streak to close up +0.53% with the NASDAQ at +0.72% ahead of today’s important PCE print.”

The headline PCE price index is expected to show an annualized increase of 4.9% for January, a touch lower than the 5% registered in December. The core PCE index, which excludes food and energy, is likely to register an annualized rise of 4.3%, from 4.4% in December, according to consensus expectations.

With little corporate news out today, investors will be focusing on next week, noted Russ Mould, investment director at AJ Bell. 

“On the US markets, we will get a good insight into consumer spending when retailer Target and drinks group Monster Beverage report on Tuesday,” Mould said. “Home improvement group Lowe’s reports on Wednesday; so does discount retailer Dollar Tree.”