U.S. stocks end lower with S&P 500 booking 6-day losing streak as investors digest Fed minutes, await CPI

What drove markets

The 12-month rate of producer price inflation slowed to 8.5% from 8.7% while the annual core rate, excluding food and energy, was unchanged at 5.6%, but the monthly rate rose 0.4% in September, above forecast, and the monthly core PPI was also up 0.4% in September.

Such data has worsened fears that to curb inflation, the Fed will continue its aggressive rate hikes, which may steer the U.S. economy into a recession.

Fed officials worried about the ongoing and “unacceptably high” inflation as it “had not yet responded appreciably to policy tightening”, minutes of the central bank’s last meeting showed on Wednesday.

“Many participants emphasized that the cost of taking too little action to bring down inflation likely outweighed the cost of taking too much action,” the minutes said.

See: Fed saw ‘too much action’ vs. high inflation as less risky than ‘too little,’ minutes show

“Ultimately, the Fed is seeking to reduce aggregate demand via a loosening in the labor market, which will reduce wage and services inflation even after the expected near-term disinflation in the goods sector runs its course,” wrote Bob Miller, head of Americas fundamental fixed income at BlackRock, in a note.

“Said more plainly, the pain already evident in some of the most interest rate sensitive parts of the economy (housing), will very likely broaden into more sectors and will intensify with time. Absent a rapid decline in relevant inflation metrics over the next few months, there’s more pain to come,” added Miller.

Traders are awaiting U.S. September consumer prices data on Thursday due at 8:30 a.m. Eastern Time. The September CPI reading, which tracks changes in the prices paid by consumers for goods and services, is expected to show an 8.1% rise from a year earlier, slowing from an 8.3% year-over-year rise seen in August. The core CPI, which omits food and energy, is expected to be running at a year-over-year pace of 6.5%, up from 6.3% in August. 

Liz Young, head of investment strategy at SoFi, doesn’t expect a big downside surprise in the CPI data as PPI prices came in above expectations and wage growth stayed steady in last Friday’s jobs report.

“If core CPI comes in at expectations, 6.5% is still pretty troublesome,” Young told MarketWatch via phone. “So I don’t think that this report is going to change the trajectory of the Fed in any way. I think that the hawkish narrative will remain that the market will continue to expect 75 basis point in November.”

Don’t miss: This is what stock-market investors will be watching for in Thursday’s CPI report after wholesale inflation rises

“The Fed has been very clear about wanting to go hard at it early, rather than waiting too long and not doing enough,” said Young. “They continue to say they’d rather be forceful in the beginning then not do enough because that would cause more problems down the road.”

The 10-year Treasury yield
TMUBMUSD10Y,
3.900%,
which started the year around 1.65% was trading at 3.901% on Wednesday, off 3.7 basis points, after the producer price inflation data and the Fed minutes.

“For us, analyzing the month over month numbers is much more important than looking at the headline,” Zachary Hill, head of portfolio management at Horizon Investments, said in an interview.

“The way we’ve been thinking about it, the last three months annualized [inflation] gives you a kind of a decent idea of where the shorter term trends are around inflation,” Hill said. “We think that’s what the Fed is going to be looking at to see progress towards their 2% goal. And unfortunately, based on various measures, we’re nowhere near that today.”

Adding to the market anxiety, and keeping any Wednesday rally in check, was the continuing volatility in U.K. government bonds after the Bank of England reiterated it would stop supporting the market after Friday.

Investors have become increasingly concerned of late that severe stresses in the financial system may emerge as central banks switch from the era of zero or negative interest rates to sharply higher borrowing costs as they try to tackle inflation at multidecade highs.

Meanwhile, the International Monetary Fund Tuesday downgraded its growth outlook for 2023, citing a long list of threats that include Russia’s war against Ukraine, chronic inflation pressures and the lingering consequences of the global pandemic. It also suggested that interest rate increases could spur a harsh global recession.

See: Wall Street’s ‘fear gauge’ is flashing a warning that stocks could be about to fall off a cliff

“We believe the odds of a recession in 2023 are now better than 50%,” Greg Bassuk, chief executive at AXS Investments, wrote in a Wednesday note. “Last week’s market turbulence saw volatility at levels we have not seen since July, and we believe investors should brace for ongoing market volatility and uncertainty throughout Q4, in concert with another likely Fed interest rate hike to the tune of 0.75% in November,” according to Bassuk.

Companies in focus

• Shares of Philips
  PHIA,
  -12.27%

  PHG,
  -11.67%
  plunged 11.7% after the Dutch tech company issued its second profit warning this year, forewarning that supply chain problems will impact sales and third-quarter profits.

• Intel Corp.
  INTC,
  +1.16%
  may fire thousands of workers by the end of the month, around the same time the chip manufacturer reports quarterly results amid a tough year for semiconductor makers, Bloomberg reported late Tuesday. The company’s shares closed 1.2% lower Wednesday.

• Shares of PepsiCo Inc. climbed 4.2% Wednesday, after the beverage and snack giant reported third-quarter profit and revenue that rose above expectations and raised its full-year outlook, as higher prices helped offset some volume weakness.

• Shares of Moderna Inc.
  MRNA,
  +8.28%
  jumped 8.3% after the company announced it will partner with Merck
  MRK,
  -0.69%
  to develop and sell a mRNA-based cancer vaccine.

— Jamie Chisholm contributed to this article.