Market Snapshot: Dow slumps nearly 900 points as stocks end sharply lower, book big weekly losses after hotter-than-expected inflation in May

What drove markets?

The stock market dropped as investors worried that surging inflation’s bigger than anticipated jump in May will prompt the Federal Reserve to become more aggressive tightening its monetary policy, potentially triggering a recession.

The consumer-price index showed U.S. inflation increased 1% in May, well above the 0.7% monthly rise forecast by economists surveyed by The Wall Street Journal. The year-over-year rate rose 8.6%, topping the 40-year high of 8.5% seen in March.

See: Consumer prices surge again, CPI shows, and push U.S. inflation rate to 8.6%

“The hotter-than-expected CPI reading is challenging the peak inflation story,” said Emily Roland, co-chief investment strategist at John Hancock Investment Management, in a phone interview Friday. The soaring 8.6% rate of inflation seen in the 12 months through May is the highest since 1981.

“We are revising our forecast to increase the probability here that we do see a hard landing” for the U.S. economy, said Roland, explaining that it’s now more likely that the Fed will be tightening into a recession as it tries to bring down the cost of living.

The consumer-price index showed the so-called core rate of inflation, which omits food and energy, rose 0.6% in May, a tick higher than expected. But the increase in the core rate over the past year slowed to 6% from 6.2%.

While the Fed views the core rate as a more accurate measure of price trends, surging food and gasoline costs are fueling a public and political outcry over inflation.

See: Biden blasts ‘rip-off’ by shipping companies, attacks Exxon as inflation hits a fresh 40-year high

“Federal Reserve policy makers like to focus on their ‘preferred’ inflation measure, core PCE, which may decline in the next several months, but in a very real sense, most U.S. households live in a headline CPI world,” said Rick Rieder, head of the BlackRock’s global allocation investment team, in emailed comments Friday.

The Fed may have to tighten policy “more aggressively than markets were hoping for,” as the latest CPI reading disrupted the idea of peak inflation, according to John Hancock’s Roland. All 11 of the S&P 500’s sectors ended down Friday, with consumer discretionary
SP500.25,
-4.16%
taking the hardest hit with a drop of 4.2%, according to FactSet data.

Read: Fed is the market’s biggest risk as stocks and bonds stumble together, says Citi

The University of Michigan’s gauge of consumer sentiment fell sharply to a record low reading of 50.2, down from a May reading of 58.4. Economists polled by The Wall Street Journal had expected a June reading of 59.

Meanwhile, Americans’ expectations for overall inflation over the next year rose in June to 5.4% from 3.3% in May. Consumer expectations for inflation over the next 5 years jumped to 3.3% from 3% in the prior month.

Also see: ‘Catastrophically bad’ inflation report is boosting chances of a 75 basis point hike in June or July

“The surge in gasoline prices to record levels will likely continue to filter into household inflation expectations if elevated prices persist well into the summer. We expect household sentiment will remain historically depressed in the near term as inflation risks remain tilted to the upside and pocketbooks continue to feel the squeeze from widespread price pressures throughout the economy,” said Kathy Bostjancic, chief U.S. economist at Oxford Economics, in a note.

The latest U.S. inflation data comes ahead of the Fed’s policy meeting next week.

“This was a very bad inflation report for both the White House and Fed,” wrote Edward Moya, senior market analyst for the Americas at OANDA, in an emailed note. “The Fed’s latest mistake is that they did not act strongly to cool inflation, and they will now be forced to deliver more rate hikes as inflation is clearly not transitory and not ready to peak.”

Which companies were in focus?

Shares of Netflix Inc. 
NFLX,
-5.10%
fell 5.1%, Roblox Corp.
RBLX,
-8.98%
sank 9%, and eBay Inc.
EBAY,
-5.16%
dropped 5.2%, with all three being among a host of internet stocks that Goldman Sachs reportedly cut to sell. Frontdoor Inc.
FTDR,
-6.79%
 was also downgraded, falling 6.8%.

DocuSign Inc.
DOCU,
-24.53%
 shares slumped 24.5% after the electronic-documents company missed on fiscal first-quarter earnings and trimmed its billings guidance.

How did other assets fare?

The yield on the 10-year Treasury note
TMUBMUSD10Y,
3.163%
jumped 11.5 basis points to 3.156%, the highest since Nov. 9, 2018 based on 3 p.m. Eastern Time levels, according to Dow Jones Market Data.

The U.S. dollar 
DXY,
+0.92%
gained against a basket of rival currencies, rising 0.9%.

Bitcoin
BTCUSD,
-0.00%
was down 3.5% at $29,089.

Crude-oil prices
CL.1,
-0.87%
ended lower, with West Texas Intermediate crude for July delivery
CLN22,
-0.87%
falling 0.7% to settle at $120.67 a barrel. The U.S. oil benchmark gained 1.5% for the week.

Gold futures expiring in August
GCQ22,
+1.23%
climbed 1.2% to settle at $1,875.50 an ounce. That’s the highest settlement for the most-active gold contract since May 5.

In European equities, the Stoxx Europe 600 Index closed 2.7% lower Friday, bringing its weekly loss to 3.9%. London’s FTSE 100 Index fell 2.1% Friday and slid 2.9% for the week.

In Asia, the Shanghai Composite
SHCOMP,
+1.42%
rose 1.4% Friday for a weekly gain of 2.8%. The Hang Seng Index
HSI,
-0.29%
edged down 0.3% Friday, but climbed 3.4% for the week. Japan’s Nikkei 225
NIK,
-1.49%
dropped 1.5% Friday and eked out a weekly gain of 0.2%

—Barbara Kollmeyer contributed to this report.