US CPI Number Sends Stock Markets Into Reverse

All three major US stock indexes ended the session deep in negative territory in the wake of the Labor Department's April consumer prices report, which showed the biggest rise in nearly 12 years.

The report, which measures the prices US consumers pay for a basket of goods, was hotly anticipated by market participants who have grown increasingly worried over whether current price jumps will defy the US Federal Reserve's reassurances by morphing into long-term inflation.

But pent-up demand from consumers flush with stimulus and savings is colliding with a supply drought, sending commodity prices spiking, while a labor shortage drives wages higher.

"The topic on everyone's mind is obviously inflation," said Matthew Keator, managing partner in the Keator Group, a wealth management firm in Lenox, Massachusetts. "It's something the (Fed) has been looking for and they're finally getting their wish."

"The question is how long will its fires run hot before starting to simmer?"

That concern is shared by Stuart Cole, head macro economist at Equiti Capital in London.

"Going forward, the big question is just how long can the Fed maintain its dovish stance in opposition to the markets," Cole said. "Particularly if companies begin raising wages to encourage unemployed labour back into the workforce, in turn driving a large hole in the Fed’s transitory inflation argument."

Core consumer prices (CPI), which exclude volatile food and energy items, grew at 3% year-on-year, shooting above the central bank's average annual 2 percent inflation growth target.

The Dow Jones Industrial Average fell 2 percent to 33,587, the S&P 500 lost 2.1 percent to 4,063 and the Nasdaq Composite dropped 2.7 percent to 13,031.

Market-leading mega-caps, including Amazon, Apple, Alphabet, Microsoft and Tesla, weighed heavily as investors shied away from what many feel are inflated valuations.

"The CPI number being stronger than expected has led to further weakness in tech stocks," said Michael James, managing director of equity trading at Wedbush Securities in Los Angeles. "Tech investors are concerned that higher rates are going to lead to multiple compression and less attractive valuations for tech names in a higher rate environment." (Reuters)