Dow falls 700 points, Nasdaq drops nearly 3% after inflation reading hits 40-year high

Stock futures dropped on Friday morning after a highly anticipated inflation report showed a faster-than-expected rise in prices.

Futures tied to the Dow Jones Industrial Average shed 279 points, or 0.9%. Those for the S&P 500 fell 1.1%, while Nasdaq 100 futures sank 1.4%.

The May consumer price index report came in hotter than expected, putting pressure on the stock market. The report showed prices rising 8.6% year over year, and 6% when excluding food and energy prices. Economists surveyed by Dow Jones were expecting year over year increases of 8.3% for the main index and 5.9% for the core index.

“It’s confirming some of the fears I’ve been hearing from investors this week,” said Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets. She said alarm over inflation has been driving stocks lower this week.

“Does it sort of force equities to stay at stay at the bottom the range it’s been in? Perhaps. I don’t think this is enough to force it down to new lows,” Calvasina added.

The hot inflation reading could lead traders to price in more rate hikes from the Federal Reserve later this year. The 2-year Treasury yield, which is seen as one of the most sensitive to Fed rate hikes, jumped above 2.8% on Friday.

The move in futures comes after stocks fell sharply during Thursday’s regular session, with the S&P 500 and Nasdaq Composite each falling more than 2%. The Dow closed down more than 600 points, losing roughly 400 points during a rocky final hour of trading on Wall Street.

For the week so far, the Dow is lower by 1.9%, on track for its 10th down week in the past 11. The S&P 500 and Nasdaq Composite are both off by more than 2%, on track for their ninth losing week in 10.

“I think there’s still a pretty high degree of pessimism that helps underpin the market, and the back-and-forth action is really the market trying to make sense of the next direction and waiting for news flow,” said Yung-Yu Ma, chief investment strategist at BMO Wealth Management.

Later on Friday, a preliminary consumer sentiment reading for June is due out after the stock market opens.

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