Dow, S&P 500, Nasdaq drop as economic worries overwhelm cooler inflation data

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A frantic rush of economic data pushed the major U.S. equity averages lower on Wednesday. While the latest PPI report pointed to decline in inflation, retail sales and industrial production statistics raised concerns that the aggressive increase in interest rates has already begun to pinch the economy.

The Nasdaq Composite (COMP.IND) closed -1.2%, the S&P 500 (SP500) finished -1.6% and the Dow (DJI) ended -1.8%.

Following a mixed performance the previous day, stocks lost ground throughout much of Wednesday’s trading, dragged down by the latest round of economic news. With the retreat, the Nasdaq broke a seven-session winning streak. Meanwhile, the Dow has fallen about 1,000 points over a two-day span.

The government’s report on producer prices showed that the annual rate of wholesale inflation moderated to 6.2% in December, compared to a mark of 7.3% in the previous month. This came in well below the 6.8% projected by economists.

The annual rate for core PPI, which excludes the volatile food and energy sectors, came in at 5.5%. This was below the 5.7% expectation.

The cooler-than-expected inflation statistics further cemented the widespread belief that the Federal Reserve will raise interest rates by just 25 basis points at its next meeting, scheduled to take place in two weeks. The markets are currently pricing in a 95% chance of a 25-basis-point increase, compared to a 77% chance a week ago.

Still, investors saw red flags in other economic reports released on Wednesday. Retail sales dropped 1.1% in December, a sharper decline than economists had predicted. In a similar sign of slowing growth, a separate report indicated that industrial production also fell more than expected in December, dropping by 0.7% from the previous month.

“Coming on the back of the weakness in retail sales, the steep drop in industrial production and news of more job lay-offs adds to fears the US could already be in recession. This is the third consecutive month of contraction in industrial activity with output declines looking broad-based,” ING said.

In the bond market, the release of the relatively soft PPI data prompted a sharp drop in yields. The 10-year Treasury yield (US10Y) fell 16 basis points to 3.37%. The 2-year yield (US2Y) dropped 11 basis points to 4.08%.

Among active stocks, PNC Financial (PNC) endured selling pressure after missing expectations with its Q4 results amid an increase in its credit loss provision.

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Now read: PNC Financial: Banking On It

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