NEW YORK — U.S. financial markets tumbled Wednesday while the latest inflation reading showed consumer prices accelerating at their fastest pace in four decades, amplifying concerns that the world’s largest economy could tip into recession within the next year.
The benchmark S&P 500 index was down more than 3 percent in afternoon trading, wiping out roughly $1.4 trillion in paper value, according to Refinitiv data. The tech-heavy Nasdaq Composite slid almost 4 percent as investors dumped rate-sensitive growth shares. Meanwhile, the yield on the 10-year U.S. Treasury briefly touched 4.35 percent, its highest level since 2007, before retreating.
Pressure intensified after the Labor Department reported that consumer prices jumped 8.6 percent in May from a year earlier, surpassing economists’ expectations and marking the steepest annual increase since December 1981. Core inflation, which strips out volatile food and energy costs, also accelerated, underscoring what Oxford Economics analyst Lydia Boussour called “clear evidence that price pressures are both broad-based and stubborn.”
The downbeat data fueled bets that the Federal Reserve will authorize an aggressive 75-basis-point interest-rate hike when policymakers meet next week. “The Fed has lost the luxury of gradualism,” said Diane Swonk, chief economist at KPMG. “They now have to front-load hikes and risk overtightening to salvage credibility.”
Rising borrowing costs have already begun to cool interest-rate-sensitive sectors. Mortgage demand fell to its lowest level in 22 years last week, according to the Mortgage Bankers Association, while auto manufacturers have reported a slowdown in showroom traffic. A brief inversion of the closely watched two-year/10-year Treasury spread — historically a harbinger of downturns — compounded the gloom.
Not everyone is sounding the alarm. White House officials highlighted a 3.9 percent unemployment rate and record household savings as buffers against contraction. “We do not see a recession as inevitable,” National Economic Council Director Lael Brainard told reporters, stressing that consumer balance sheets remain “historically healthy.”
Still, a growing roster of forecasters is trimming growth outlooks. JPMorgan Chase on Tuesday cut its 2024 GDP projection to 0.8 percent from 1.4 percent, citing tighter financial conditions. Should price pressures fail to ease by autumn, economists warn, the Fed could be forced into further supersized hikes that would crimp corporate earnings and household spending.
Market participants will next parse Friday’s University of Michigan consumer-sentiment survey for clues on whether Americans are pulling back. “If sentiment collapses, the soft landing narrative becomes much harder to sustain,” said Sam Stovall, chief investment strategist at CFRA.
For now, traders are bracing for more volatility, with the CBOE VIX index hovering near its highest level since the regional banking turmoil in March. As Swonk put it, “The runway is getting shorter, and the margin for policy error is shrinking by the day.”