Dow ends 160 points lower after Fed minutes show officials debating inflation risk, and when to talk about tapering

How did stock benchmarks perform?

• The Dow Jones Industrial Average DJIA, -0.48% fell 164.62 points to close at 33,896.04, a decline of 0.5%, leaving the blue-chip index up less than 0.1% for May.
• The S&P 500 index SPX, -0.29% shed 12.15 points, or 0.3%, to end at 4,115.68. It had touched an intraday low at 4,061.41.
• The Nasdaq Composite Index COMP, -0.03% finished virtually flat, off 3.90 points at 13,299.74, well off its Wednesday low of 13,072.23.

On Tuesday, the Dow fell by 267.13 points, or 0.8%, to close at 34,060.66, the S&P 500 finished with a loss of 35.46 points, or 0.9%, at 4,127.83, and the Nasdaq Composite slipped 75.41 points, or 0.6%, to finish at 13,303.64.

What drove the market?

Stocks booked a third day of losses, after the release of Fed meeting minutes showed debate emerging within the central bank over whether rising inflation will be more than “transitory” as the central bank keeps monetary policy accommodative in the wake of the pandemic.

Minutes also showed some members of the rate-setting Federal Open Market Committee were open in April to the possibility of starting discussions around when to taper the Fed’s near $120 billion a month asset purchases, particularly if the economy continues to make rapid progress as COVID-19 cases decline and more of the U.S. population gets vaccinated.

Read: Fed minutes include talk about potential future discussions of tapering

Back in late April, the FOMC voted unanimously to maintain accommodative policies, aimed at holding down short-term borrowing costs between 0% and 0.25%, while maintaining its pace of monthly asset purchases. Fed Chairman Jerome Powell, at the time, described the economic recovery from the COVID pandemic as uneven and incomplete.

But pricing pressures have intensified since then, with Atlanta Fed President Raphael Bostic on Wednesday saying he remains open to “every scenario,” as it relates the outlook for the economy in the recovery phase from the COVID pandemic.

St. Louis Fed President James Bullard also told reporters Wednesday that the Fed has “sketched out” a plan for inflation to likely run above 2% this year and next, but will remain nimble in its response.

Read: Fed officials say they aren’t oblivious to the risk of surging inflation

“Inflation is a dog that had not barked in the night for a long time,” said John Carey, director of equity income at Amundi US, in an interview with MarketWatch after the Fed minutes. But he also said the “old dog” appears to be making noise again.

“We will see,” Carey said. “But I fear the Fed is getting too complacent about inflation, because it can get out of control pretty quickly, and get ugly.”

Bob Miller, BlackRock’s head of Americas fundamental fixed income, said he thinks the “economic re-opening is creating supply-side frictions that should abate as labor supply improves and supply chains respond, but that may take a couple of quarters to achieve,” in written comments.

The divergent views underscore the struggle participants have with the concept of “transitory” inflation pressures, as described by a number of Fed officials.

“Our view remains that tapering will be discussed around August/September this year, with a formal announcement in December that tapering will commence in 1Q22,” wrote analysts at UniCredit.

Investors also focused on a new ECB report warning about potential “abrupt asset price corrections,” after the recent rally in financial assets.

“You have a third central bank come out and question valuations,” said Larry Adam, chief investment officer at Raymond James, pointing to recent comments by the Fed and ECB on potentially sharp asset price declines following significant rallies, as well as remarks from the Bank of China about “unreasonable” increases in commodity prices.

“When you start to combine that,” Adam said, investors have responded by saying: “Let’s focus on fundamentals,” particularly when it comes to high growth technology companies that have yet to turn a profit.

A sharp selloff across crypto assets also attracted attention. Bitcoin BTCUSD traded near $40,000 on Wednesday, recovering a chunk of early losses after dipping to a low around $30,000. Market strategists said the downturn in crypto also may reflect weakening bullish sentiment for speculative assets.

Read: What crypto analysts say investors should do as bitcoin market hit by ‘extreme fear’

Which companies were in focus?

• Advanced Micro Devices Inc.  AMD, +2.40% shares rose 2.4%, after its board approved a $4 billion share repurchase program.
• Squarespace Inc. SQSP, -12.70% shares slumped 12.7% Wednesday, following its direct listing on the New York Stock Exchange.
• Lowe’s Cos. LOW reported Wednesday fiscal first-quarter profit, sales and same-store sales that rose above expectations, and provided an upbeat outlook. Shares fell 1.1%.
• Target Corp. TGT, +6.09% reported net income totaled $2.097 billion, or $4.17 per share, up from $284.0 million, or 56 cents per share, last year. Adjusted EPS of $3.69 was 525% higher than last year, reaching an all-time high. Its stock rose 6.1%.
• Southwest Airlines Co. LUV shares lost 2.7% despite disclosing Wednesday that April operating revenue and load factor were in line with expectations, and said it continues to see improvement in leisure passenger demand and bookings for May and June travel. 
• Purple Innovation Inc. shares PRPL, -4.02% tumbled 4% after the mattress and sleep products company priced a secondary offering of 7.3 million shares at $30 each, a discount over its closing price of $32.50 on Tuesday. 

How did other assets fare?

• The yield on the 10-year Treasury note TMUBMUSD10Y was up 3 basis points to 1.67%. Yields and bond prices move in opposite directions.
• The ICE U.S. Dollar Index DXY, a measure of the U.S. currency against a basket of six major rivals, was up 0.5%.
• West Texas Intermediate crude for June delivery CL.1, -3.30% CLM21, -3.30% fell $2.13, or nearly 3.3%, to settle at $63.36 a barrel on the New York Mercantile.
• June gold futures GCM21, +0.15% rose $13.50, or 0.7%, to settle at $1,876.50 an ounce, extending a climb for the most-active contract, which finished at its highest since Jan. 7 on Tuesday, FactSet data show.
• The Stoxx Europe 600 index SXXP booked a decline of 1.5%, while London’s FTSE 100 UKX fell 1.2%.
• In Asian trade, Japan’s Nikkei 225 NIK, -1.28%  lost 1.3% and the Shanghai Composite SHCOMP, -0.51%  edged down 0.5%.