U.S. stocks end sharply lower, Dow suffers fourth straight weekly fall after Fed’s favorite inflation gauge runs hotter than expected

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U.S. stocks finished sharply lower Friday, with all three major indexes suffering weekly losses, after the Federal Reserve’s preferred inflation measure came in hotter-than-expected for January.

How stocks traded

  • The Dow Jones Industrial Average fell 336.99 points, or 1%, to close at 32,816.92, after declining 510 points at its session low.
  • The S&P 500 fell 42.28 points, or 1.1%, to finish at 3,970.04.
  • The Nasdaq Composite sank 195.46 points, or 1.7%, to end at 11,394.94.

For the week, the Dow fell 3% while the S&P 500 slid 2.7% and the technology-heavy Nasdaq Composite dropped 3.3%, according to FactSet data. The Dow has fallen for four straight weeks, booking its biggest weekly percentage decline since September 2022 and longest weekly losing streak since May 2022, according to Dow Jones Market Data. The S&P 500 saw a third consecutive week of declines.

What drove markets

U.S. stocks sank Friday, suffering weekly losses as concerns over sticky inflation weighed on the market.

The personal-consumption-expenditures price index showed the cost of U.S. goods and services jumped 0.6% in January, according to a Bureau of Economic Analysis report Friday. That was biggest rise since last summer. The year-over-year rate rose to 5.4%, from 5.3% in December, in the first uptick in seven months.

The more closely followed core index, which is the Fed’s preferred inflation measure, also rose 0.6% in January, climbing 4.7% over the past 12 months. Economists polled by The Wall Street Journal had forecast that core PCE prices would rise 0.5% in January and 4.4% year over year.

“The core PCE data was very disappointing,” said Philip Orlando, chief equity market strategist at Federated Hermes, in a phone interview Friday.

It confirms the recent narrative that “inflation is sticky and persistent,” he said, and “it is not coming down nearly as quickly as the immaculate disinflation crowd expected.” That has investors “nervous” that “the Fed may have to get even more aggressive than the ‘Street’ thought just a month or two ago,” said Orlando.

The S&P 500 has fallen 5% from its 2023 closing high on Feb. 2.

“We think we’re going to grind lower over the next couple of months,” said Orlando. “We could very easily retest the mid-October lows we saw last year.”

Meanwhile, consumer spending rose 1.8% in January, the biggest increase in almost two years. And an index of consumer sentiment rose in early February to a 13-month high of 67. The final reading in February was up from a preliminary 66.4 and from 64.9 in January, the University of Michigan said. 

Such data was seen cementing expectations the Federal Reserve will continue lifting its key interest rate above 5% in its effort to bring down inflation.

Edward Moya, analyst at Oanda, said in a note that “this morning’s data suggest the economy is very resilient and might prompt more bets that the Fed will need to take rates closer to 6.00%.”

The strong job market may make it hard for the U.S. central bank to bring down inflation, according to Fed governor Philip Jefferson.

“The ongoing imbalance between the supply and demand for labor, combined with

the large share of labor costs in the services sector, suggests that high inflation may come down only slowly,” Jefferson said Friday in a speech at a University of Chicago Booth School of Business conference in New York.

Federated Hermes’s Orlando worries that the U.S. economy is not in decent shape despite the low unemployment rate. He described corporate earnings for the fourth quarter as “a disaster,” with the vast majority of companies reporting lower guidance for full-year 2023. And looking under the hood of the “GDP” data released Feb. 23, Orlando said he worries “the economy is sliding towards recession.”

While revised government figures showed that gross domestic product grew at a 2.7% annual pace in the fourth quarter, Orlando said the “private domestic final sales number” in “the weeds” of the GDP data pointed to an economic slowdown.

In other economic data, sales of new single-family houses in the U.S rose 7.2% in January to a seasonally adjusted annual rate of 670,000, according to a report Friday from the Commerce Department. Still, year over year, new-home sales are down by 19.4%.

“Most of the housing data has been pretty negative,” said Erik Knutzen, chief investment officer of multiasset strategies at Neuberger Berman, in a phone interview Friday. “Certainly, if rates stay higher for longer that’s going to continue to put pressure on the housing market.”

Meanwhile, the yield on the 10-year Treasury note rose 6.9 basis points Friday to 3.948%, according to Dow Jones Market Data. Knutzen currently considers 10-year yields within “fair value range” but cautioned that “stocks probably have more pressure on them in the future.”

Companies in focus

  • Carvana Co. said it plans to complete a $1 billion reduction in operating costs by the second quarter of 2023 as the online car-sales company seeks to right itself without resorting to layoffs. Shares tumbled 20.5%.
  • Shares of Dow component Boeing Co. fell 4.8% as the airplane maker halted deliveries of the 787 Dreamliner. The Federal Aviation Administration said deliveries are temporarily halted as Boeing is conducting additional analysis on a fuselage component.
  • Shares of Open Lending Corp. sank 23.2% after the company swung to an unexpected loss in the fourth quarter.
  • Turning Point Brands Inc.  shares jumped 11% after the maker of Zig-Zag rolling papers beat its revenue and earnings targets. 

Movers & Shakers: Boeing stock slips after deliveries of 787s halted; Beyond Meat shares rally after plant-food maker’s results

William Watts and Steve Goldstein contributed reporting to this article

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