Stocks slid after data showed that US inflation will remain high for quite some time, adding to concern the Federal Reserve may be forced to unleash further tightening measures that could tip the economy into a recession.

Remarks from Fed Bank of Atlanta President Raphael Bostic didn’t help sentiment either as the official said he’s open to “moving more” on rates if inflation persists at elevated levels. The S&P 500 erased gains and dropped to its lowest since March 2021, while the tech-heavy Nasdaq 100 tumbled about 3 per cent amid a rout in giants like Tesla Inc. and Apple Inc. Small caps sank after a rally that approached 2 per cent earlier in the day. The Treasury curve flattened, with the gap between two- and 10-year yields narrowing nine basis points.

Investors seem to agree that a 75 basis-point hike isn’t likely, according to pricing in federal-fund futures markets. But they did increase bets that the Fed will roll out another half-point hike in September -- following increases of that size in June and July. The US central bank hiked interest rates by a half-point last week and Fed Chair Jerome Powell signaled that similar rate increases are on the table for the next two meetings, while pushing back against making a larger move.

While annual measures of consumer prices cooled slightly from March -- signaling a peak that economists expected -- the details of a report Wednesday painted a more troubling picture as monthly figures advanced more than forecast. Services costs accelerated while inflation for most goods remained stubbornly high, underscoring the persistence and breadth of price pressures.

Reaction to CPI:

• “Inflation appears to be entrenched within many areas of the economy and regardless if we have witnessed inflation peak, a persistently slow grind lower will be more problematic for the Fed to simultaneously cool inflation without tipping the economy into recession,” said Charlie Ripley, senior investment strategist at Allianz Investment Management.
• “Although the possibility of peak CPI being behind us remains on the table, the way back to acceptable levels still looks to be some distance away, both in terms of time and potential monetary tightening,” said Michael Shaoul, chief executive officer at Marketfield Asset Management.
• “This reading does not change the Fed’s path on policy, but extends the window for more market volatility ahead as clarity on inflation remains elusive,” said Cliff Hodge, chief investment officer at Cornerstone Wealth.
• “A moderating inflationary environment in the second half of the year means there will be less pressure on the Fed to combat inflationary pressures with aggressive monetary policies, which leaves open the possibility of a soft landing of the economy as opposed to the crash and burn that markets have been pricing in as of late,” said Peter Essele, head of portfolio management at Commonwealth Financial Network.

The rout in stocks isn’t over just yet, according to Morgan Stanley strategists, who see scope for equities to correct further amid mounting concerns of slowing growth. Strategist Michael Wilson, who has long been a skeptic of the decadelong bull run in US stocks, said in a note that even after five weeks of declines, the S&P 500 is still mispriced for the current environment of the Fed tightening policy into slowing growth.

“We continue to believe that the US equity market is not priced for this slowdown in growth from current levels,” Wilson said in a note. “We expect equity volatility to remain elevated over the next 12 months.” He recommends defensive positioning with an overweight in health-care, utilities and real-estate shares.

The S&P 500 may be at risk of further downside toward 3,600 points -- down 10 per cent from the Tuesday close -- before reaching a historically important technical support level. The 200-week moving average since 1986 has seen the US benchmark bounce back during all major bear markets, except for the tech bubble and the global financial crisis.

Here are key events to watch this week:

• San Francisco Fed President Mary Daly speaks, Thursday
• US PPI, initial jobless claims, Thursday
• University of Michigan consumer sentiment, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 1.6 per cent as of 4 p.m. New York time
• The Nasdaq 100 fell 3.1 per cent
• The Dow Jones Industrial Average fell 1 per cent
• The MSCI World index fell 0.9 per cent

Currencies

• The Bloomberg Dollar Spot Index was little changed
• The euro fell 0.1 per cent to US$1.0516
• The British pound fell 0.6 per cent to US$1.2243
• The Japanese yen rose 0.4 per cent to 129.95 per dollar

Bonds

• The yield on 10-year Treasuries declined eight basis points to 2.91 per cent
• Germany’s 10-year yield declined one basis point to 0.99 per cent
• Britain’s 10-year yield declined two basis points to 1.83 per cent

Commodities

• West Texas Intermediate crude rose 5.4 per cent to US$105.13 a barrel
• Gold futures rose 0.6 per cent to US$1,852.50 an ounce