US stocks fall as hot inflation data and Federal Reserve rate worries hit markets

US stocks dropped on Tuesday as a hotter-than-expected inflation report pushed investors to price in an upcoming interest rate hike from the Federal Reserve next month. The Labor Department reported that the Consumer Price Index rose 0.4% last month, beating the 0.3% estimate from economists and marking the third straight month of gains of 0.4% or more.

Market Impact

The Dow Jones Industrial Average fell 0.43%, the S&P 500 lost 0.64%, and the Nasdaq Composite dropped 1.15%. Markets fully priced in a December rate hike of at least 25 basis points after Fed Governor Christopher Waller said the central bank should raise short-term borrowing costs and consider an upsized half-point increase if inflation worsens. Other officials including Dallas Fed President Lorie Logan and Kansas City Fed President Jeff Schmid also took hawkish tones.

Treasury Yields

The two-year US Treasury yield surged 19.1 basis points to 4.738%. CNBC reported that the 10-year Treasury yield traded above 5% before paring gains to rise more than 12 basis points at 4.985%, while the 30-year bond yield rose more than 9 basis points to 5.35%. A soft $42 billion Treasury note auction also added downward pressure on bonds.

Technology and AI

Nvidia shares fell more than 5% amid an internal probe involving CEO Jensen Huang and Chinese businesswoman Alice Huang, adding to pressure on the tech sector. Meanwhile, Anthropic revealed its upcoming initial public offering is expected to raise up to $64.4 billion with a valuation of up to $1.4 trillion, and cloud firm CoreWeave saw its shares drop 2.3% ahead of its earnings report.

Context

Inflation reports like the Consumer Price Index are closely watched by financial markets because they heavily influence central bank monetary policy. When consumer prices rise faster than expected, central banks typically respond by raising interest rates to cool economic activity, which makes borrowing more expensive and often leads to lower stock prices.