Wall Street slides as CPI data locks in another hefty Fed rate hike

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By Stephen Culp

NEW YORK (Reuters) - Wall Street tumbled in a broad sell-off on Tuesday after hotter-than-expected inflation data dashed hopes that the Federal Reserve could relent and scale back its policy tightening in the near future.

The S&P 500, the Dow and the Nasdaq all veered sharply lower, snapping a four-day winning streak and erasing a sizeable chunk of recent gains.

Surging risk-off sentiment pulled every major sector deep into negative territory, with interest-rate-sensitive tech and tech-adjacent market leaders, led by Apple Inc (NASDAQ:AAPL), Microsoft Corp (NASDAQ:MSFT) and Amazon.com Inc (NASDAQ:AMZN) weighing heaviest.

The Labor Department's consumer price index (CPI) came in above consensus, interrupting a cooling trend and throwing cold water on hopes that the Federal Reserve could relent after September and ease up on its interest rate hikes.

Core CPI, which strips out volatile food and energy prices, increased more than expected, rising to 6.3% from 5.9% in July.

"This was another disappointment," said Mona Mahajan, senior investment strategist at Edward Jones in St Louis. "It's the old Charlie Brown analogy - every time we're ready to kick the ball, it's moved away from us."

"It's two steps forward and one step backwards and this may be a step back today."

Financial markets have fully priced in an interest rate hike of at least 75 basis points at the conclusion of the FOMC's policy meeting next week, with an 18% probability of a super-sized, full-percentage-point increase to the Fed funds target rate, according to CME's FedWatch tool. [FEDWATCH]

"Bottom line, (the CPI report) only fortifies the Fed’s hand for a tougher inflation fight," said Peter Cardillo, chief market economist at Spartan Capital Securities.

Worries persist that a prolonged period of policy tightening from the Fed could tip the economy over the brink of recession.

The inversion of yields on two- and 10-year Treasury notes, regarded as a red flag of impending recession, widened further. [US/]

The CBOE Market Volatility index, often dubbed "the fear index," was set for its biggest one-day point jump since late August.

The Dow Jones Industrial Average fell 904.26 points, or 2.79%, to 31,477.08, the S&P 500 lost 127.23 points, or 3.10%, to 3,983.18 and the Nasdaq Composite dropped 478.03 points, or 3.9%, to 11,788.38.

All 11 of major sectors in the S&P 500 were deep in red territory, with communications services tumbling the most.

Consumer discretionary, tech and the tech subset semiconductor sector were suffering steeper drops than the broader market.

Declining issues outnumbered advancing ones on the NYSE by a 7.82-to-1 ratio; on Nasdaq, a 3.62-to-1 ratio favored decliners.

The S&P 500 posted 1 new 52-week high and 2 new lows; the Nasdaq Composite recorded 23 new highs and 122 new lows.