The Dow Jones Industrial Average fell by 422.16 points, or 1.09 percent, to 38,461.51. The S&P 500 sank 49.27 points, or 0.95 percent, to 5,160.64. The Nasdaq Composite Index shed 136.28 points, or 0.84 percent, to 16,170.36.
Ten of the 11 primary S&P 500 sectors ended in red, with real estate and utilities leading the laggards by losing 4.10 percent and 1.73 percent, respectively. Energy bucked the trend by rising 0.38 percent.
According to the U.S. Labor Department's Bureau of Labor Statistics, the CPI, which measures the costs of goods and services across the economy, increased by 0.4 percent for the month. This pushed the 12-month inflation rate to 3.5 percent, up by 0.3 percentage points from February. Excluding the volatile food and energy components, the core CPI showed a 0.4 percent acceleration on a monthly basis, with a year-over-year rise of 3.8 percent. These figures surpassed expectations of 0.3 percent and 3.7 percent, respectively.
The markets had initially anticipated that the Fed would begin cutting interest rates in June, with a total of three reductions expected for the year. However, this outlook shifted significantly following the release of the CPI data. Traders in the fed funds futures market adjusted their expectations, pushing the anticipated timing of the first rate cut out to September, as calculated by CME Group. Stocks slumped after the report while Treasury yields spiked higher.
U.S. President Joe Biden said there is "more to do" to keep costs down. "Today's report shows inflation has fallen more than 60 percent from its peak, but we have more to do to lower costs for hardworking families. Prices are still too high for housing and groceries, even as prices for key household items like milk and eggs are lower than a year ago," he said in a statement Wednesday morning.
"There's not much you can point to that this is going to result in a shift away from the hawkish bent" from Fed officials, said Liz Ann Sonders, chief investment strategist at Charles Schwab. "June to me is definitively off the table."
"This marks the third consecutive strong reading and means that the stalled disinflationary narrative can no longer be called a blip," said Seema Shah, chief global strategist at Principal Asset Management. "In fact, even if inflation were to cool next month to a more comfortable reading, there is likely sufficient caution within the Fed now to mean that a July cut may also be a stretch, by which point the U.S. election will begin to intrude with Fed decision making."
Ron Conzo, CEO and Managing Director of Wealth Alliance, believes that there are overreactions in the markets as investors are "hyper-focused" on inflation. "The Fed's rate cuts will be pushed off, but the economy is doing well and could survive and work well in a higher rate form," Conzo said, adding that investors should try to ignore "the noise" and turn their focus to corporate earnings and the health of the labor market.
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