US Markets Slump On Inflation, Economy Jitters

US stocks dropped on Friday as worsening inflation expectations kept intact worries that the Federal Reserve's aggressive rate hike path could trigger a recession, while investors digested the early stages of earnings season.

The S&P 500 lost 2.4 percent to 3,583, and the Nasdaq Composite lost 3.1 percent to 10,321. The Dow Jones Industrial Average fell 1.3 percent to 29,634.

In the last session of a volatile week, equities opened higher, then reversed course after data from the University of Michigan showed consumer sentiment improved in October but inflation expectations worsened as gasoline prices moved higher. Retail sales data also indicated resilience among consumers.

"You get that University of Michigan data to say that maybe we are going to see those inflation expectations rising, and the Fed really wants to front-run inflation expectations, they understand monetary policy doesn’t operate mechanically, it operates more psychologically through expectations, so they want to make sure those expectations stay firmly planted around 2 percent to 2.5 percent," said Brian Jacobsen, senior investment strategist at Allspring Global Investments in Menomonee Falls, Wisconsin.

On Thursday, a reading on consumer prices (CPI) showed inflation remained stubbornly high.

Fed officials have been largely in sync when commenting on the need to raise rates and St. Louis Fed President James Bullard said in a Reuters interview the recent CPI data warrants a continued "frontloading" through larger three-quarter-percentage point steps, although that does not necessarily mean rates need to be raised above the central bank's most recent projections.

Corporate earnings season started to pick up steam and helped lift the bank index as one of the few bright spots on the session after quarterly results from JPMorgan Chase, Citigroup, and Wells Fargo boosted the shares of each.

"The message I got from them is things are looking pretty good from an economic perspective despite the challenges but they increased loan-loss reserves just in anticipation that you are going to see some more slowing," said Jacobsen.

UnitedHealth gained, one of the few Dow components to move higher after the health insurer posted better-than-expected quarterly results while raising its annual forecast.

Kroger shares dropped after the supermarket chain said it would buy smaller rival Albertsons Companies in a US$24.6 billion deal.

Tesla slumped following media reports that the electric vehicle maker has put on hold plans to launch battery cell production at its plant outside Berlin due to technical issues. (Reuters)