Nasdaq, S&P, Dow drop after sticky core CPI shaves odds of a super-sized rate cut

Key U.S. stock market averages fell Wednesday, after the August core consumer price index came in above estimates, slicing the probability that the Federal Reserve will start an interest rate-easing cycle with a big cut.

The CPI report showed core CPI, which strips out volatile food and energy prices, rose 0.3% M/M in August, higher than the 0.2% expected rate. For the Fed’s meeting next week, odds of a large cut of 50 basis points fell to 15% while odds of a 25 basis points reduction increased to 85%, according to the CME FedWatch tool.

“If it weren’t for sticky core services… this would be a very cold 50bps cut report,” Viraj Patel, senior strategist at Vanda Research, said in a post on X (formerly Twitter).

The S&P 500 (SP500) was -1.1%, the Nasdaq Composite (COMP:IND) was -0.8%, and the Dow (DJI) was -1.4%, but the indexes did pare losses. All 11 of the S&P 500’s (SP500) sectors were in the red, led by -2% slide in Financials.

In the bond market, the 10-year Treasury yield (US10Y) turned lower, down 1 basis point to 3.64%. The 2-year yield (US2Y) shed 1 basis point to 3.61%.

“Annual inflation decelerated in August to 2.5% from 2.9% in July, giving the Fed flexibility to focus on the job market,” Jeffrey Roach, chief economist at LPL Financial, said. “Given the stickiness of services inflation, the Fed will likely cut by 25 basis points in the upcoming meeting and reserve the potential for more aggressive action later this year if we have further deterioration in the job market.”

U.S. stock averages finished Tuesday mixed, ahead of Tuesday night’s highly anticipated U.S. presidential debate between Vice President Kamala Harris and Former President Donald Trump.

“From a market perspective, we believe that the presidential race should still be viewed as a toss up, but there is likely to be a Harris lean in sentiment after her clear debate victory,” Isaac Boltansky, director of policy research at BTIG, said in a note.

Shares of Trump Media & Technology (DJT) -13% after the debate, the only one that has been scheduled between Trump and Harris.

Among individual market movers, Albemarle (ALB) +10.5%, topping the S&P 500 (SP500) following a Reuters report that China’s CATL, the largest maker of electric vehicle batteries, is mulling a suspension of some lithium mining and production operations.

GameStop (GME) -14% after the videogame retailer late Tuesday delivered a mixed Q2 earnings report. The company’s non-GAAP EPS of $0.01 beat expectations by $0.10 while $798.3M in revenue missed the $896M consensus estimate.