Stocks Slip After Fed Minutes and Inflation Data

U.S. stocks slipped Wednesday in the wake of new inflation data and the release of the minutes of the September meeting of the Federal Reserve’s rate-setting board.

The S&P 500 edged down 11.81 points, or 0.3%, to 3577.03, a nearly two-year low. The Dow Jones Industrial Average lost 28.34 points, or 0.1%, closing at 29210.85. The Nasdaq Composite dropped 9.09 points, or 0.1%, to 10417.10, a day after the tech-heavy index entered its second bear market of 2022, marking a drop of more than 20% from its recent high on Aug. 15.

Investors have been on edge this week ahead of the release of Thursday’s report on consumer prices in the U.S. that will shed light on how much work the Fed has left to do in containing decades-high price rises. In recent months, inflation gauges have shown widespread pricing pressures on categories such as food and housing, while energy prices have eased.

U.S. suppliers increased the prices they charge customers by 0.4% in September from a month earlier, according to data released Wednesday. Economists polled by The Wall Street Journal had expected a 0.2% increase.

As inflation climbs in the U.S., rising food and energy costs have pushed the nation’s most popular price index to its highest level in four decades. WSJ’s Gwynn Guilford explains how the consumer-price index works and what it can tell you about inflation. Illustration: Jacob Reynolds

“Inflation certainly broadened out and entered into areas that were more sticky,” said

Kiran Ganesh,

a multiasset strategist at

UBS.

“That’s why there’s been an increase in expectations…that the Fed needs to keep rates at a higher level for longer to get inflation down.”

The Fed released Wednesday afternoon the minutes of its September meeting, which showed officials concerned over the persistence of high inflation and expecting that bringing prices and wages down would likely require the labor market to weaken.

The Fed’s stance has heightened the risk of a recession, but it doesn’t appear the economy is in one now, said Merk Investments strategist Nicholas Reece. A recession may in fact come as late as the second half of next year, he said. That, however, likely means the market may churn along for several more months before finally hitting a cycle low. “That’s one of the things hanging over this market,” he said.

Corporate earnings over the next several weeks will also provide insight into how businesses are dealing with price pressures.

PepsiCo

on Wednesday again lifted its sales outlook for the year as it continues to push through price increases on its snacks and drinks, sending shares up $6.80, or 4.2%, to $169.39.

Traders working on the floor of the New York Stock Exchange last week.



Photo:

BRENDAN MCDERMID/REUTERS

The coming days will bring updates from a range of companies including

Delta Air Lines

and banks such as JPMorgan Chase and Citigroup.

Mr. Ganesh said earnings estimates for the remainder of the year and 2023 are too optimistic, posing another risk for stocks in the months ahead.

“If you look at market performance so far this year, it’s pretty much fully explained by the move in rates and bond yields,” said Mr. Ganesh. “Higher rates should mean lower expectations for growth and earnings, and that’s not priced into the market yet.”

Investors also continue to watch turmoil in U.K. government-bond markets, which have been highly volatile since the government set plans for large, debt-funded tax cuts last month. The Bank of England’s attempt to prevent broader market dysfunction that had hit pension funds particularly hard has had mixed results. 

On Tuesday, BOE Gov. Andrew Bailey confirmed the central bank plans to wind down its bond-market intervention program by Friday as planned, sparking a selloff in the British pound. The message was reiterated by BOE officials on Wednesday.

U.K. markets were mixed. The pound rebounded 1.2% to $1.1099, but U.K. government bonds, known as gilts, remained under pressure. The 30-year U.K. gilt yield briefly topped 5%, a level last seen before the central bank’s intervention. Yields rise as prices fall.

The U.S. 10-year Treasury note was down slightly at 3.901%.

“Bond markets think the BOE isn’t doing enough,” said

Viraj Patel,

a global macro strategist at Vanda Research. Despite the BOE’s pledge to wind down bond-buying, Mr. Patel still believes the central bank would step in with support if volatility again threatens financial stability.

“They won’t let this get to some sort of chaos that spirals out of control,” he said.

The U.K.’s FTSE 100 fell 0.9% to 6826.15, while the pan-European Stoxx Europe 600 lost 0.5% to 385.88.

Asian stocks were mixed. China’s benchmark Shanghai Composite gained 1.5% to 3025.51, while Hong Kong’s Hang Seng declined 0.8% to 16701.03 and Japan’s Nikkei 225 index was little changed at 26396.83.

Write to Chelsey Dulaney at chelsey.dulaney@wsj.com and Paul Vigna at Paul.Vigna@wsj.com

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