Nasdaq retreats as rate hike fears cool stock rally

© Reuters. A trader works on the trading floor at the New York Stock Exchange (NYSE) in Manhattan, New York City, U.S., August 8, 2022. REUTERS/Andrew Kelly

By Herbert Lash and Bansari Mayur Kamdar

NEW YORK (Reuters) - The Nasdaq retreated to close lower on Thursday despite fresh evidence of cooling inflation on the realization the Federal Reserve still needs to aggressively boost interest rates to fully tame rising consumer prices.

The S&P 500 retreated after earlier hitting fresh three-month highs after data showed the U.S. producer price index unexpectedly fell in July.

The drop in PPI raised bets in futures markets that the Fed would hike rates by 50 basis points in September instead of 75 basis points as was expected earlier in the week.

The S&P 500 and Nasdaq had surged more than 2% on Wednesday after a softer-than-expected read on consumer inflation. But the rally came as policymakers left little doubt they will tighten monetary policy until price pressures fully abate.

With the labor market showing signs of softness as the number of Americans filing new claims for unemployment benefits rose for the second straight week, the Nasdaq turned lower as investors questioned the economy's strength.

"It was a better CPI print yesterday than expected and a better PPI print this morning than forecasted by analysts. So it fit that theme, that peak inflation has occurred as energy continues to decline," said George Catrambone, head of Americas trading at DWS Group. "But I would be concerned about a head fake."

According to preliminary data, the S&P 500 lost 3.19 points, or 0.08%, to end at 4,207.05 points, while the Nasdaq Composite lost 74.73 points, or 0.58%, to 12,780.08. The Dow Jones Industrial Average rose 32.20 points, or 0.10%, to 33,341.71.

Six of the 11 major S&P 500 sectors advanced, with energy leading with a 3% gain that helped value stocks advance as growth shares fell.

Boosting the blue-chip Dow and the S&P 500, banks extended their rally with Goldman Sachs (NYSE:GS) and JPMorgan Chase & Co (NYSE:JPM) up more than 1% each.

Benchmark U.S. Treasury yields hit more than two-week highs as bond investors bet the Fed will press on with hiking rates as inflation is still hot, even though price pressures have eased a bit. [US/]

Aggregate demand, as seen by an almost 9% increase in aggregate spending power, is still too strong and may lead the Fed to stay aggressive longer than many hope, said Jack Janasiewicz, lead portfolio strategist at Natixis Investment Managers Solutions.

"We're becoming a little more worried because the Fed might have to do a little bit more work to try to cool that excess demand side of the equation," Janasiewicz said.

High-growth stocks that had rallied on Wednesday, such as Tesla (NASDAQ:TSLA) Inc and Amazon.com Inc (NASDAQ:AMZN), fell.

Despite its recent bounce of mid-June lows, the tech-heavy Nasdaq is down 17.8% so far this year as fears of an aggressive monetary policy sapped appetite for equities, particularly high-growth stocks.

The U.S. central bank has raised its policy rate by 225 basis points since March as it battles to cool demand without sparking a sharp rise in layoffs.

In earnings-driven news, Walt Disney (NYSE:DIS) jumped as the media giant edged past rival Netflix Inc (NASDAQ:NFLX) with 221 million streaming customers and announced it will increase prices for customers who want to watch Disney+ or Hulu without commercials.

Bumble Inc fell on cutting its full-year revenue forecast, taking a hit from the Ukraine war, while also grappling with competition from rival Match Group Inc (NASDAQ:MTCH) in the online dating market.