U.S. stocks continued to decline in early trading on Tuesday, with the Dow Jones Industrial Average falling by 340 points. The U.S. Consumer Price Index for April rose by 3.8% year-over-year, reaching a new high since May 2023, while crude oil prices continued to climb. Market attention remained focused on developments in U.S.-Iran relations.
As of early trading, the Dow Jones Industrial Average was down 342.40 points, or 0.69%, at 49,362.07. The Nasdaq Composite fell 205.56 points, or 0.78%, to 26,068.57, and the S&P 500 dropped 39.81 points, or 0.54%, to 7,373.03.
West Texas Intermediate crude oil futures rose 3% on Tuesday, surpassing $101 per barrel. Brent crude also increased by 3%, breaking above $107 per barrel. This followed remarks from former U.S. President Donald Trump, who described a month-long ceasefire agreement with Iran as "incredibly weak" and stated that, after rejecting an "unacceptable" counter-proposal from Tehran, the deal was now "on massive life support."
Trump's latest comments contributed to the upward momentum in oil prices.
In its latest counter-proposal, Iran insisted on war reparations, full sovereignty over the Strait of Hormuz, the unfreezing of Iranian assets, and the lifting of sanctions.
Wall Street had just experienced a positive trading session, with the S&P 500 and Nasdaq Composite both reaching record highs.
A robust earnings season has continued to drive the stock market higher in recent sessions. Marci McGregor, Chief Investment Office Portfolio Strategist at Merrill and Bank of America Private Bank, expressed continued optimism about the overall market.
"If the market shows weakness after such a strong rebound from the March lows, I would view it as a buying opportunity because the current market is driven by corporate profits, capital expenditures, and a strong labor market. We have many reasons to remain optimistic," she said.
On the economic data front, Tuesday's report showed that the U.S. CPI for April reached its highest level in three years.
Prices paid by consumers for goods and services rose at a faster-than-expected pace in April, raising further concerns about the impact of inflation on the U.S. economy.
The U.S. Bureau of Labor Statistics reported on Tuesday that, on a seasonally adjusted basis, the Consumer Price Index increased by 0.6% month-over-month and 3.8% year-over-year. The monthly increase met expectations, but the annual rate was 0.1 percentage points higher than the median forecast in a Dow Jones survey.
Excluding food and energy, the core CPI rose 0.4% month-over-month and 2.8% year-over-year. This indicates that while inflation remains well above the Federal Reserve's 2% target, a significant portion of the pressure comes from non-core areas, particularly energy.
The overall annual inflation rate is the highest since May 2023, up 0.5 percentage points from March. The core annual inflation rate increased by 0.2 percentage points.
Energy prices were once again a major driver of the inflation surge, rising 3.8%, while food prices increased by 0.5%. Over the past 12 months, energy prices have surged 17.9%, food prices are up 3.2%, and the gasoline price index has risen 28.4% year-over-year.
Although energy, particularly gasoline, was the primary factor pushing overall inflation higher, inflationary pressures also stemmed from several other areas.
Housing costs rose 0.6%, apparel increased 0.6%, and airline fares accelerated, rising 2.8% with a 12-month increase of 20.7%. Import tariffs also appeared to affect other sectors, with prices for household furnishings and operations up 0.7%.
The report also contained negative news for workers: real average hourly earnings declined 0.5% for the month and were down 0.3% year-over-year.
The latest inflation data arrives as the Federal Reserve stands at a crossroads. Policymakers have kept the benchmark interest rate unchanged throughout the year amid disagreements over the central bank's direction and how to communicate its intentions.
In late April, the Fed once again voted to hold rates steady, but with four dissenting votes—the highest number since 1992. Fed Governor Stephen Milan again voted against the decision, advocating for a 25-basis-point rate cut, while three regional Fed presidents objected to language in the statement that markets interpreted as signaling the next move would be a rate cut.
Meanwhile, incoming Fed Chair Kevin Warsh has advocated for lower interest rates, a stance that is difficult to reconcile with the surge in inflation following the outbreak of the Iran conflict. Energy prices have risen sharply, with oil surpassing $100 per barrel and the national average price for gasoline reaching $4.50 per gallon, according to AAA.
Markets widely expect the Fed to remain on hold this year, with pricing reflecting a low probability of a rate hike. However, according to data from CME Group, traders have increased their expectations for a rate hike before the end of the year.
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