A rout in technology companies dragged down the stock market, with investors gearing up for a key inflation report that’s expected to bring more insights on the outlook for the Federal Reserve’s next steps.

The Nasdaq 100 underperformed, falling 1.1 per cent. Apple Inc., which unveiled the iPhone 15 and other products, dropped almost 2 per cent. Its launches are famous “sell-the-news” events. Oracle Corp. sank the most since 2002 after a slowdown in cloud sales. US-traded BP Plc shares slid as its chief resigned at a time when the company is trying to persuade investors to stick with it through a costly transition to low-carbon energy. A rally in crude sent energy shares higher and added to concern about inflationary pressures. Banks also gained amid a presentation at the Barclays Global Financial Services Conference.

Treasury two-year yields, which are more sensitive to imminent Fed moves, topped 5 per cent. The auction of 10-year US Treasury notes on Tuesday drew the highest yield since 2007 — a day after a sale of three-year notes did the same — as investors demand increased compensation for elevated inflation and growth in the supply of U.S. government debt. The dollar edged higher.

Wednesday’s consumer-price index is expected to show a pick-up in inflation pressures. With the economy defying pessimism and energy prices rising, analysts predict the biggest monthly jump in 14 months — and the swap market is pricing in risk that it will come in even higher than expected. Traders expect the Fed to stay on hold at a policy meeting next week, and see roughly a 50 per cent chance that it delivers a hike in November.

“In our view, it may be a good moment for investors to consider allocation moves that prepare for a re-firming of inflation this fall,” said Lauren Goodwin, economist and portfolio strategist at New York Life Investments. “For example, cyclical growth equity sectors soared on hopes of a divine disinflation and near-term Fed cuts. Yet, if inflation re-emerges, these sectors might give up some of their year-to-date gains.”

The Cleveland Fed’s Nowcast model suggests upside risks for CPI, with persistently high inflation seen in September as well, according to Win Thin, global head of currency strategy at Brown Brothers Harriman.

“With inflation data expected to show ongoing stickiness, we think it’s risky to go into tomorrow’s CPI report short dollars,” Thin noted.

CPI is really key because if it halts its downward trend, markets will have to price in a more hawkish Fed — and that would be a headwind on stocks, said Tom Essaye, a former Merrill Lynch trader who founded The Sevens Report newsletter.

“Put in a more familiar way, CPI impacts two of the three pillars of the rally: disinflation and expectation the Fed is done with rate hikes,” Essaye noted. “If CPI is too hot, both will be damaged.”

Traders continued watching closely the negotiations between the United Auto Workers and automakers to prevent a strike. General Motors Co., Ford Motor Co. and Stellantis NV are under pressure to meet the demands of the UAW, which is seeking a new contract that replaces one expiring in just two days. A strike, even a short one, would ripple across the US economy. That includes possibly pushing Michigan into a brief recession.

There’s been a “dramatic shift” in investors’ equity allocation — a rush toward the US and an exodus from emerging markets, Bank of America Corp.’s latest global fund manager survey showed.

That’s had an impact on emerging markets equity allocation, which fell to a net 9 per cent overweight in September from 34 per cent, the lowest reading since November 2022. In contrast, allocation to US equities rose 29 percentage points to a net 7 per cent overweight — the first overweight reading since August last year, according to the survey.

To Dan Wantrobski at Janney Montgomery Scott, the market continues to carve out a “rangebound glide path” near term, and this should possibly continue being the case as we move through September and into the final quarter of 2023.

“Overall, we believe elevated volatility will surface again, but stocks may still see more rally efforts over the short-run - making for a very choppy trading range.”

Corporate Highlights

• Top U.S. wireless carriers announced free iPhone promotions following Apple’s introduction of its newest models Tuesday.
• Walmart Inc.’s top executive predicted a “pretty good” holiday shopping season as U.S. consumers hold up better than the nation’s largest retailer anticipated at the beginning of the year.
• Alphabet Inc.’s Google pays more than US$10 billion a year to maintain its position as the default search engine on web browsers and mobile devices, stifling competition, the U.S. Justice Department said.
• United Parcel Service Inc. will pay out the biggest portion of its new, five-year labor pact over the next 12 months while trying to win back customers it lost during the contentious contract talks, making for a challenging upcoming year, its chief executive said.
• Intel Corp. agreed to sell roughly 10 per cent stake in the IMS Nanofabrication business to TSMC in a deal that values the company at $4.3 billion.
• Chevron Corp. will become majority owner of what’s expected to be the world’s largest hydrogen production and storage facility as the oil giant invests in tech aimed at addressing the intermittency that plagues wind and solar power.
• Smurfit Kappa Group Plc agreed to acquire WestRock Co. in an $11.2 billion deal that creates an Irish-American packaging industry powerhouse.

Key events this week:

• Japan PPI, Wednesday
• Eurozone industrial production, Wednesday
• U.K. industrial production, Wednesday
• U.S. CPI, Wednesday
• Tech leaders including Tesla’s Elon Musk and Meta Platforms’ Mark Zuckerberg are set to attend a forum on the future of AI convened by Senator Chuck Schumer, Wednesday
• Japan industrial production, Thursday
• European Central Bank policy meeting and news conference by President Christine Lagarde, Thursday
• U.S. retail sales, PPI, business inventories, initial jobless claims, Thursday
• China property prices, retail sales, industrial production, Friday
• U.S. industrial production, University of Michigan consumer sentiment, Empire Manufacturing index, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 0.6 per cent as of 4 p.m. New York time
• The Nasdaq 100 fell 1.1 per cent
• The Dow Jones Industrial Average was little changed
• The MSCI World index fell 0.4 per cent

Currencies

• The Bloomberg Dollar Spot Index was little changed
• The euro fell 0.2 per cent to $1.0728
• The British pound fell 0.1 per cent to $1.2492
• The Japanese yen fell 0.4 per cent to 147.13 per dollar

Cryptocurrencies

• Bitcoin rose 3.9 per cent to $26,071.13
• Ether rose 3.7 per cent to $1,598.38

Bonds

• The yield on 10-year Treasuries declined three basis points to 4.26 per cent
• Germany’s 10-year yield was little changed at 2.64 per cent
• Britain’s 10-year yield declined six basis points to 4.42 per cent

Commodities

• West Texas Intermediate crude rose 1.9 per cent to $88.94 a barrel
• Gold futures fell 0.6 per cent to $1,935.70 an ounce

This story was produced with the assistance of Bloomberg Automation.

--With assistance from Isabelle Lee and Felice Maranz.