US Equities Fall as Hot Inflation Data Boosts Fed Hike Odds

US equity indexes declined after the Bureau of Labor Statistics reported that the consumer price index rose 0.6% in September, a figure that aligned with expectations from a Bloomberg-compiled poll. The hotter-than-expected data increased the likelihood of three Federal Reserve rate increases by the first quarter, sending mega-cap technology stocks sharply lower. After midday Wednesday, the Nasdaq Composite dropped 1.8% to 26,714.8, the S&P 500 slid 1.2% to 7,712.5, and the Dow Jones Industrial Average fell 0.4% to 51,472.5.

Core CPI climbed 0.3%, exceeding the 0.2% consensus while matching the previous month's pace. Year-over-year inflation accelerated to 3.7% for the overall index and 2.6% for core, up from 3.4% and 2.4% respectively, beating market expectations. A 9.1% month-over-month surge in gasoline dominated the headline rate, according to Jefferies. The firm noted that several upside surprises in core inflation imply higher energy prices are passing through to non-energy goods.

Thomas Simons, Jefferies chief US economist, stated in a note that while several policymakers had suggested no need to rush a hike in October, this data provides a stronger argument for higher rates. Jefferies' base case now expects the Federal Reserve to raise rates by 25 basis points in both October and December, with a bias to continue in 2027.

The CME FedWatch tool showed the probability of a 25 basis point rate lift in October nearly doubled to 44% on Wednesday afternoon. The tool assigned a 39% likelihood of another 25 basis point increase in December, up from 19% the previous day. It also placed a 39% probability on a similar move in March, pushing rates toward the 4.5% to 4.75% range, up from 30% a day earlier.

Most US Treasury yields jumped, with the two-year yield rising 3.2 basis points to 4.83%. All sectors except healthcare, consumer staples and energy retreated after midday, with technology, consumer discretionary and industrials leading the decline. The PHLX Semiconductor Index (SOX) slumped 3.9%, marking its sixth consecutive day of declines.

Among stocks with market capitalizations exceeding $200 billion, eight of the bottom ten performers were technology names, according to Finviz data. Dell Technologies (DELL) led the decliners, falling 11%. Bank of America (BAC) shares slumped 6% after the bank reported an unexpected year-over-year drop in Q3 earnings due to a regulatory settlement charge and a revenue miss. Morgan Stanley (MS) shares slid 3.6% despite reporting higher Q3 earnings and revenue.

In geopolitical developments, Reuters reported that Iran-aligned Houthis vowed to continue attacking Saudi Arabian airports and oil facilities following damage to Saudi Aramco headquarters. Two senior Iranian officials told Reuters that Iran is deploying new tactics to target ships in the Strait of Hormuz to keep oil prices high and influence US midterm elections.

The front-month US West Texas Intermediate crude oil contract advanced 1.5% to $95.55 per barrel, while Brent crude climbed 0.8% to $106.51 per barrel. Gold futures sank 1.78% to $4,107.40, and silver futures plunged 6.1% to $55.91.