US close: Rising yields hit stocks as inflation proves sticky in Q1

dl wall street wall st new york city nyc ney york stock exchange nyse nasdaq dow jones industrial average djia trading us usa united states of america 2023120702241 — Sharecast graphic / Josh White

US stocks fell sharply on Thursday after data confirmed the stickiness of inflation in the first quarter despite a drop in economic growth which pushed bond yields to their highest in six months.

Despite paring losses by the close, the Dow still finished down 0.98%, while the S&P 500 fell 0.46% and the Nasdaq dropped 0.64%, as investors continued to digest a barrage of corporate earnings from some heavyweight names.

US GDP growth slowed by more than anticipated in the first quarter, the Department of Commerce reported on Thursday, yet price pressures unexpectedly picked up.

Annual GDP growth slowed to just 1.6% from 3.4% in the fourth quarter and well below the 2.5% consensus forecast. However, the closely watched core PCE deflator surged from 2.0% to 3.7% – nearly double the rate seen in each of the preceding two quarters.

"This combination of slower growth alongside higher prices is worrying. If higher prices persist, the Fed will find it hard to cut rates to support growth," said Ryan Brandham, head of global capital markets, North America at Validus Risk Management.

The yield on a 10-year US Treasury note climbed 6.2 basis points to 4.708% following the figures – its highest level since November.

"We revised our Treasury yield baseline forecasts higher this month in response to solid underlying economic growth and stickier inflation figures. We pushed back the expected timing of the first Federal Reserve rate cut from June to September, and there is a risk that it may need to be pushed back further, lifting short-term Treasury coupon yields," said John Canavan, lead analyst at Oxford Economics.

More data to digest...

There was a host of other economic indicators released during the session for traders to pour over.

Initial weekly jobless claims fell by 5,000 to 207,000 last week, marking the lowest level in two months and below market expectations for a reading of 214,000, providing more support for the notion of a tight labour market.

Wholesale inventories dropped 0.4% in March, defying market expectations of a 0.2% rise and following a downwardly revised 0.4% increase in February. Durables inventories were unchanged, while non-durables stocks decreased 1.1%.

The US trade deficit in goods widened to $91.83bn in March from a revised $90.30bn in February. This was the largest in 11 months and higher than estimates of $91.2bn. Imports declined by 1.7%, while exports fell by a faster 3.5%.

Finally, US pending home sales ticked up 3.4% in March for the first increase since May 2021.

Market movers

Shares in Meta sunk 11% after the social media titan underwhelmed with revenue guidance for the second quarter, even though first-quarter numbers beat forecasts. Meanwhile, an earnings call with founder and chief executive Mark Zuckerberg revealed that investments into AI and mixed reality were rising despite the company not making any money in those areas.

A host of other blue chip tech stocks were also weaker. Microsoft and Alphabet both were in the red ahead of their earnings due out after markets closed, while Amazon also fell sharply.

IBM dropped 8% after a mixed quarterly performance, where revenues beat forecasts but profits didn't. Investors were also reacting to the news the company is acquiring cloud software firm HashiCorp for $6.4bn.

Drugmaker Bristol Myers Squibb also fell sharply after announcing plans to cut its workforce by 6% as part of a $1.5bn cost-savings programme, as it reported better-than-expected results for the first quarter.

Shares in Southwest Airlines fell 7% after the carrier revealed that it will pull out of four airports to improve its financial performance, as it reported a wider-than-expected loss for the first quarter and trimmed its annual guidance.

Dow Jones - Risers

Merck & Co. Inc. (MRK) $130.67 2.93%
Intel Corp. (INTC) $35.11 1.77%
Boeing Co. (BA) $166.81 1.51%
Unitedhealth Group Inc. (UNH) $493.86 1.35%
Chevron Corp. (CVX) $165.28 1.05%
Walmart Inc. (WMT) $60.21 0.57%
Apple Inc. (AAPL) $169.89 0.51%
Coca-Cola Co. (KO) $61.74 0.31%
Travelers Company Inc. (TRV) $213.99 0.26%
JP Morgan Chase & Co. (JPM) $193.37 0.15%