S&P 500, Nasdaq retreat despite signs of slowing inflation

© 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 S&P 500 and Nasdaq retreated on Thursday despite fresh evidence of inflation cooling further on the realization the Federal Reserve needs to aggressively boost interest rates to fully tame rising consumer prices.

The benchmark index earlier rose after data showed U.S. producer prices unexpectedly fell in July, bolstering bets in futures markets that the Fed would hike rates by 50 basis points in September instead of 75 basis points.

Traders now are pricing in a 59.5% chance that the Fed will hike rates by 50 basis points at the next policy meeting in September, compared to a 68% chance of 75 basis points before the CPI data was released on Wednesday.

The S&P 500 and Nasdaq surged more than 2% on Wednesday after a softer-than-expected read on inflation. But the rally came as policymakers left no doubt they will tighten monetary policy until price pressures are fully broken.

With the labor market showed signs of softness as the number of Americans filing new claims for unemployment benefits rose for the second straight week, the Nasdaq was first index to turn lowers as investors questioned the rally'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."

The Dow Jones Industrial Average rose 36.42 points, or 0.11%, to 33,345.93, while the S&P 500 lost 1.57 points, or 0.04%, to 4,208.67 and the Nasdaq Composite dropped 70.02 points, or 0.54%, to 12,784.78.

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 by 1.8% with Goldman Sachs (NYSE:GS) and JPMorgan Chase & Co (NYSE:JPM) up 1.3% and 1.6%, respectively.

But the tech-heavy Nasdaq lagged as many megacap growth and technology stocks reversed early gains as U.S. Treasury yields pared losses. [US/]

Aggregate demand, as seen by an almost 9% increase in consumer 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 more than 1% each. [US/]

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 5.4% 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 7.7% 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.

Advancing issues outnumbered declining ones on the NYSE by a 2.11-to-1 ratio; on Nasdaq, a 1.40-to-1 ratio favored advancers.

The S&P 500 posted four new 52-week highs and 29 new lows; the Nasdaq Composite recorded 63 new highs and 17 new lows.