Dow falls nearly 200 points as U.S. stocks post back-to-back losses ahead of July inflation data

By Isabel Wang and Frances Yue

U.S. oil benchmark settles at a 2023 high of $84.40 a barrel

U.S. stocks finished lower on Wednesday, posting back-to-back losses after a slump in technology shares and a jump in U.S. crude oil prices weighed on Wall Street, while investors absorbed news of deflation in China and looked ahead to the U.S. July consumer price index data due Thursday morning.

How stocks traded

On Tuesday, the Dow fell 159 points, or 0.45%, to 35,314, the S&P 500 declined 19 points, or 0.42%, to 4,499, and the Nasdaq dropped 110 points, or 0.79%, to 13,884.

What drove markets

Investors awaited a batch of U.S. inflation reports which include the July consumer-price index data due Thursday and the producer-price index due Friday for clues on whether the Federal Reserve is finally ready to call it quits on its most aggressive inflation fight in four decades.

Economists polled by the Wall Street Journal forecasted the consumer price index to rise 0.2% in July, at the same pace from the prior month. They also expected the annual rate of inflation to accelerate to 3.3% from 3% in the prior month.

The so-called core CPI, which excludes food and energy prices, is expected to grow 0.2% in July. The rate of core inflation over the past 12 months is expected to slow to 4.7% in July from 4.8% in the prior month.

See:July CPI to come in close to expectations as U.S. settles into final mile along the road to lower inflation, traders say

Kathryn Rooney Vera, chief market strategist at StoneX, said she doesn't think the CPI data tomorrow would be a "big market mover." However, "what the market is focused on is soft landing, being if the Fed is able to get the economy to decelerate in terms of inflation pressures towards the 2% target without eliciting any form of economic contraction," said Rooney Vera via phone.

But market expectations for a soft landing are "unlikely to be challenged by inflation data this week," said Veronica Clark and Andrew Hollenhorst, economists at Citigroup.

"With markets pricing just around 8 basis points more of Fed hikes this year, but still-strong activity data implying that near-term cuts are also unlikely, a 0.1% increase in core CPI could a have somewhat more limited impact than an upside surprise," they wrote in a Tuesday note. "The chance of additional hikes from the Fed would be further priced out, but softer inflation could be less surprising given already-rising expectations for a soft landing."

Markets priced in an 86.5% probability that the Fed will leave interest rates unchanged at a range of 5.25%-5.5% on Sept. 20, according to the CME FedWatch Tool. The chances of a 25-basis-point rate hike to a range of 5.5%-5.75% at the subsequent meeting in November was priced at 27.9% Wednesday afternoon.

See:'Alarming' China data upsets global stock markets

Also weighing on the sentiment is that news of falling consumer prices in China -- which fell 0.3% for the year to July -- dovetails with the country's weak trade data released this week and raises concerns that growth is faltering in the world's second biggest economy.

"China is now witnessing the actual cost of goods both in stores and at the factory gate falling. It is indicative of a significant slowdown in the Chinese economy, which is beset by high levels of indebtedness," said Steve Clayton, head of equity funds, Hargreaves Lansdown.

However, traders also note that deflationary pressures emanating from China may help further reduce goods inflation in the U.S. and elsewhere, thereby helping central banks to soon stop raising borrowing costs.

"Markets don't appear too adventurous ahead of the U.S. CPI; instead, traders are reverting the risk-off trade from overnight markets after yet another August storm front passed. But much of the move is likely pre-U.S. CPI housekeeping, given that stocks, bonds and currency markets react wildly to CPI beats and misses," said Stephen Innes, managing partner at SPI Asset Management.

The second quarter corporate earnings season continues on Wednesday, with Roblox (RBLX), Penn Entertainment (PENN), Wynn Resorts (WYNN) and Walt Disney (DIS) presenting their numbers.

There were no major U.S. economic data due on Wednesday.

Companies in focus

Jamie Chisholm contributed

-Isabel Wang

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

08-09-23 1622ET

Copyright (c) 2023 Dow Jones & Company, Inc.