U.S. stocks dropped Thursday, with investors mulling how this week’s inflation report likely cements the Federal Reserve’s path to continue raising interest rates aggressively.

The three major indexes fell at the open, rose briefly at midmorning and then fell again in erratic trading. The S&P 500 fell 44.66 points, or 1.1%, to 3901.35 after data showed a strong economy that could encourage the Fed to keep raising interest rates at a rapid pace.

The tech-focused Nasdaq Composite dropped 167.32 points, or 1.4%, to 11552.36. The Dow Jones Industrial Average fell 173.27 points, or 0.6%, to 30961.82.

Global markets were mixed. The Stoxx Europe 600 lost 0.7%. Japan’s Nikkei 225 gained 0.2%.

The market is going to be choppy between now and the Fed meeting next week, said Ava Trade analyst Naeem Aslam. Mixed economic data and stubbornly high inflation make the Fed’s job harder, though he said that talk of a full percentage-point interest-rate raise is likely overdone. But another raise of 0.75 percentage point is probable—much to the market’s chagrin.

Stocks had stabilized Wednesday after slumping on Tuesday, when the Labor Department reported that inflation had remained stubbornly high in August. The data jolted many investors who had hoped that fewer supply-chain strains and falling commodity prices would enable the central bank to tone down its inflation-taming efforts in the coming months. The S&P 500 on Tuesday endured its worst day since 2020.

“It looks like central banks certainly have got religion in terms of their inflation-busting mandate and they’re unlikely to swing that to stabilizing economic growth,” said Edward Park, chief investment officer at Brooks Macdonald.

Nonetheless, Mr. Park said he expects stocks to rise in the coming weeks. Investors have already braced for a 0.75-point increase to the Fed’s main rate this month, he said. They are keen not to miss out on a rally that would likely follow data published in October if those statistics show inflation easing, he added..

Expectations that the Fed will keep pushing interest rates higher have knocked government-bond prices, boosting yields. Ten-year Treasury yields rose to 3.458% Thursday, from 3.411% Wednesday. Yields have been rising since early August on expectations of further rate increases, and aren’t far off their high for the year of 3.482% from mid-June.

Trading in interest-rate futures implies a 74% chance that the Fed raises rates by three-quarters of a percentage point at its meeting next week, according to CME Group. Market pricing suggests a 26% chance that the Fed raises its rate target by a full point.

On the economic front, retail sales rose 0.3% in August, the Commerce Department said Thursday, showing the resilience of U.S. consumers in the face of high inflation. U.S. applications for unemployment benefits declined for the fifth consecutive week as employers held on to their workers in a persistently tight labor market.

A separate report on industrial production registered a slight downtick, dropping 0.2% from July, showing U.S. factories lost some steam.

In corporate news, Adobe shares fell $62.39, or 17%, to $309.13 after the company agreed to buy collaboration-software company Figma for about $20 billion, in the technology giant’s largest acquisition.

Railroad stocks fell, even after the White House said a tentative agreement had been reached to avert a shutdown on railways. Shares of Union Pacific edged higher by 41 cents, or 0.2%, to $218.36. CSX fell $1.06, or 3.4%, to $30.17.

Elsewhere, NextEra Energy fell $2.87, or 3.2%, to $86.01 after saying it would raise almost $2 billion in equity.

SOURCE :- wsj