U.S. Markets Fall amid Inflation Worries

U.S. stocks dropped on Friday as worsening inflation expectations kept intact worries that the Federal Reserve's aggressive rate hike path could lead to an economic recession, while investors digested the early stages of earnings season.

In what has been a volatile week for stocks, equities opened higher before reversing course after data from he University of Michigan showed consumer sentiment improved in October but inflation expectations worsened as gas prices moved higher. Retail sales data also indicated resilience among consumers.

"You get that University of Michigan data to say that maybe we are going to see those inflation expectations rising, and the Fed really wants to front-run inflation expectations, they understand monetary policy doesn’t operate mechanically, it operates more psychologically through expectations, so they want to make sure those expectations stay firmly planted around 2% to 2.5%," said Brian Jacobsen, senior investment strategist at Allspring Global Investments in Menomonee Falls, Wisconsin.

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The data came a day after a reading on consumer prices showed inflation remains stubbornly high.

The Dow Jones Industrial Average fell 398.96 points, or 1.33%, to 29,639.76, the S&P 500 lost 80.64 points, or 2.20%, to 3,589.27 and the Nasdaq Composite dropped 288.66 points, or 2.71%, to 10,360.49.

Corporate earnings season started to pick up steam, helping lift banks, up 0.16%, to be among the few bright spots on the session after quarterly results from JPMorgan Chase & Co, which gained 2.12%, Citigroup Inc, up 0.76%, and Wells Fargo & Co, which rose 2.65%.

"The message I got from them is things are looking pretty good from an economic perspective despite the challenges but they increased loan-loss reserves just in anticipation that you are going to see some more slowing," said Jacobsen.

UnitedHealth gained 0.71% as one of the few Dow components to move higher on the session after the health insurer posted better-than-expected quarterly results while raising its annual forecast.

Analysts now expect third-quarter profits for S&P 500 companies to have risen just 3.6% from a year ago, much lower than an 11.1% increase expected at the start of July, according to Refinitiv data.

The Dow was on track to close out the week with a gain while the S&P 500 and Nasdaq were poised for weekly declines.

Kroger Co dropped 8.01% after the supermarket chain said it would buy smaller rival Albertsons Companies Inc in a $24.6 billion deal.

Tesla Inc slumped 6.18% following media reports that the electric vehicle maker has put on hold plans to launch battery cell production at its plant outside Berlin due to technical issues.

Investors also monitored UK politics after British Prime Minister Liz Truss fired her finance minister Kwasi Kwarteng and scrapped parts of their economic package in a desperate bid to stay in power and survive the market and political turmoil.

Declining issues outnumbered advancing ones on the NYSE by a 4.18-to-1 ratio; on Nasdaq, a 2.91-to-1 ratio favored decliners.

The S&P 500 posted 5 new 52-week highs and 5 new lows; the Nasdaq Composite recorded 56 new highs and 171 new lows.

(Reuters Reporting by Chuck Mikolajczak; Editing by Chizu Nomiyama)

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