U.S. stocks fell on Wednesday, with the S&P 500 down 0.6% and the Dow Jones Industrial Average dropping 0.2% (87 points). The Nasdaq composite also decreased by 1.1%. This downturn was primarily driven by a surge in oil prices and a surprisingly strong report on U.S. business activity.
Brent crude oil rose 2.4% to $101.59 a barrel, reversing a recent decline. This increase in oil prices contributed to higher bond yields, as did a preliminary report indicating that U.S. business activity experienced its strongest growth in over five years. The yield on the 10-year Treasury jumped to 5.05% from 4.96% late Tuesday, marking a significant move for the bond market and reaching its highest level since 2007. The 2-year Treasury yield also rose to 4.862%, the highest since June 2024.
The strong economic data and rising oil prices intensified concerns about inflation, leading traders to increase their bets on further Federal Reserve interest rate hikes. Fed funds futures traders are now pricing in a 73% chance of an October rate hike, up from 53% earlier. Federal Reserve Governor Michael Barr indicated that "further policy adjustments are likely to be needed" to bring inflation down to target. Businesses are also facing rising costs, particularly for fuel, which could lead to increased prices for consumers and worsen inflation.
Despite the broader market decline, some companies reported stronger-than-expected profits. KB Home, a homebuilder, delivered a better profit report than analysts anticipated, but its stock still slipped 1% due to concerns about the housing market stemming from higher mortgage rates and geopolitical uncertainty. General Mills also exceeded profit expectations, though its stock fell 1.6% as the company anticipates slower growth for the fiscal year due to a challenging consumer environment, as rising costs for fuel and groceries are discouraging consumers.
