Wall Street’s euphoric rally came to an abrupt halt as scorching inflation data shattered investor confidence and forced a dramatic reassessment of Federal Reserve policy expectations, sending shockwaves through financial markets that had been riding high on rate cut optimism. The unexpected surge in producer prices delivered a devastating blow to the widespread belief that the Fed would aggressively lower interest rates, triggering immediate selling pressure across major indices and exposing the fragility of recent market gains.
Market Response to Inflation Data
Wall Street’s main indexes declined on Thursday, after a hotter-than-expected producer prices report dampened investor expectations of potential interest-rate cuts by the Federal Reserve this year.
A Labor Department report showed the Producer Price Index rose 3.3% on an annual basis in July, higher than the 2.5% gain expected by economists polled by Reuters. On a monthly basis, it rose 0.9%, compared with an estimated 0.2% rise.
Traders lowered their Fed rate-cut expectations for the rest of the year to about 58 basis points, according to data compiled by LSEG, compared with around 63 bps before the report.
“It’s sending a mixed message about the economy,” said Peter Andersen, founder of Andersen Capital Management in Boston.
“We have been too anxious to draw a conclusion that the economy is fine, it’s not overheated. But this wholesale data does show that perhaps there is some inflation working and we shouldn’t be so quick to conclude that we need to cut interest rates.”
Stock Performance and Sector Impact
At 09:42 a.m. ET, the Dow Jones Industrial Average .DJI fell 164.29 points, or 0.37%, to 44,757.98, the S&P 500 .SPX lost 16.84 points, or 0.26%, to 6,449.74 and the Nasdaq Composite .IXIC lost 22.69 points, or 0.10%, to 21,690.45.
Recent data reflecting labor market weakness and a moderate rise in consumer prices had strengthened expectations that the central bank will potentially lower interest rates next month.
However, Thursday’s report fanned concerns that U.S. tariffs on imports could start to impact prices in the coming months and dampen a rally in U.S. stocks that had helped the benchmark S&P 500 .SPX and tech-heavy Nasdaq .IXIC log record highs over the past two sessions.
On Thursday, nine of the 11 S&P 500 sectors declined, with materials .SPLRCM, down 1.2%, falling the most. Rate-sensitive small-caps .RUT and housing stocks .HGX also dropped more than 1% each.
Federal Reserve Policy Implications
Separate data showed the number of Americans filing new applications for jobless benefits fell last week amid low layoffs.
A report also showed San Francisco Fed President Mary Daly pushed back against the need for a 50-basis-point interest rate cut next month, a day after Treasury Secretary Scott Bessent said an aggressive half-point cut was possible.
Cisco Systems CSCO.O lost 1% after the network equipment manufacturer’s broadly in-line forecast did little to encourage investors.
Deere & Co DE.N fell 8% after the farm-equipment maker reported a lower quarterly profit and tightened its annual profit forecast, while Tapestry TPR.N plunged 17.6% after the Coach handbag maker forecast annual profit below estimates.
Corporate Earnings and Tariff Impact
Later in the day, investors will also tune into remarks from St. Louis Fed President Alberto Musalem, a Federal Open Market Committee voting member this year.
Declining issues outnumbered advancers by a 5.05-to-1 ratio on the NYSE and by a 3.38-to-1 ratio on the Nasdaq.
Market Outlook and Fed Communications
Thursday’s market turbulence serves as a stark reminder that the path to lower interest rates remains fraught with uncertainty, as persistent inflation continues to challenge Federal Reserve policy assumptions and investor expectations. The dramatic shift in market sentiment following a single data release demonstrates how quickly optimistic narratives can unravel when confronted with economic reality. Corporate warnings about tariff impacts signal that inflationary pressures may intensify rather than subside in coming months, potentially forcing the Fed to maintain a more hawkish stance than markets had anticipated.
GCN.com/Reuters.