NASDAQ Slides as PPI, Jobless Claims Data Fuel Fears of More Fed Rate Hikes

The major U.S. stock indexes are under pressure shortly after the opening on Thursday after higher-than-expected producer prices data likely cemented the chances that the Federal Reserve will keep raising interest rates to tame inflation.

At 17:00 GMT, the blue chip Dow Jones Industrial Average settled at 33927.70, down 200.35 or -0.59%. The benchmark S&P 500 Index finished at 4123.53, down 25.07 or -0.58% and the tech-heavy NASDAQ Composite closed at 12001.06, down 69.54 or -0.58%.

Stock Market Remains Data Dependent

This week’s price action clearly shows the U.S. stock market is data dependent and likely to remain that way until the investors can determine when the Fed will stop raising rates and at what level.

The Fed has raised its policy rate by 450 basis points since last March from near zero to a 4.50%-4.75% range with the bulk of the increases between May and December 2023.

Since Feb. 3 when the non-farm payrolls report blew away the forecasts, investors have been pricing in two additional rate hikes of 25 basis points in March and May, respectively. However, the strong consumer inflation report on Tuesday and the jump in retail sales on Wednesday, have the financial markets betting on another increase in June.

The chances of a June rate hike increased on Thursday after the Labor Department showed monthly producer prices accelerating in January. The producer price index for final demand rebounded 0.7% last month after decreasing 0.2% in December.

Additionally, the number of Americans filing new claims for unemployment benefits unexpectedly fell last week, offering more evidence of the economy’s resilience despite tighter monetary policy.

Fed Speakers’ Remarks Weigh on Sentiment

Adding to the downbeat sentiment, Cleveland Fed President Loretta Mester said inflation remains too high and noted that she was open to raising rates by more than what her colleagues wanted at the last monetary policy meeting.

Earlier in the week on Tuesday, New York Fed President John Williams said Tuesday inflation remains his number one concern, adding the Fed will stay the course on raising rates until the central bank achieves its 2% inflation goal.

“We will stay the course until our job is done,” Williams said in a speech at the New York Bankers Association in New York on Tuesday. “We much restore balance to the economy and bring inflation down to 2 percent on a sustained basis.”

Traders will also get the chance to react to remarks from other Fed officials, including St. Louis Fed President James Bullard, to assess the central bank’s tone on monetary policy.

Short-Term Outlook

Some of the price action this week reflected the possibility that investors had already priced in two 25-basis point rate hikes by the Fed in March and May. However, Thursday’s price action suggests gains could be capped over the near-term if investors now have to consider a possible third 25-basis point rate hike in June.