US stocks have closed lower, as a hotter-than-expected inflation reading hardened expectations for a rate hike from the Federal Reserve in December and fuelled concerns the central bank may be more aggressive in raising rates.
The Labor Department said the Consumer Price Index increased 0.4 per cent in October, its third straight gain of 0.4 per cent or more and above the 0.3 per cent estimate of economists polled by Reuters, after advancing 0.6 per cent in September.
The data came after Fed Governor Christopher Waller said the central bank should raise short-term borrowing costs in December even if data showed inflation cooled last month, and should consider an upsized half-point rate hike if the inflation picture worsens.
Markets are now completely pricing in a rate hike of at least 25 basis points at the Fed's December meeting, according to CME FedWatch, up from 84 per cent on Monday, while expectations for a 50 basis point increase climbed to 11.8 per cent after garnering no consideration at all in the prior session.
The two-year US Treasury yield, which typically moves in step with interest rate expectations for the Fed, surged nearly 18.9 basis points to 4.736 per cent and was poised for its biggest daily gain since April 9, 2025, after US President Donald Trump launched sweeping global tariffs.
The jump in yields has come even as oil prices have eased to two-month lows as US officials have downplayed any imminent military actions against Iran.
"What kind of has the market spooked a little bit is this idea of, 'Well, we were already pricing in a December hike ... but maybe it's not 25, maybe it's 50, and maybe the Fed's more worried about inflation than I am, so let's sell some stocks,'" said Jason Ware, chief investment officer at Albion Financial Group in Salt Lake City, Utah.
"From our perch, that is irrational. The thing that has pushed CPI up over the last six months and has the Fed a little bit more concerned and therefore has restarted hiking rates is because we've seen oil, energy and diesel push through in terms of inflation. If we have oil now going the other way ... this is all going to settle down."
The Dow Jones Industrial Average fell 157.86 points, or 0.30 per cent, to 52,231.89, the S&P 500 lost 29.01 points, or 0.38 per cent, to 7,520.93 and the Nasdaq Composite lost 187.26 points, or 0.74 per cent, to 25,065.87.
The S&P 500 and Nasdaq had risen for two straight days, bouncing back from sharp losses last week sparked by concerns about the potential for government regulations slowing the AI buildout.
But the S&P 500 technology sector dropped 1.4 per cent on Tuesday as the worst-performing of the 11 major sectors, weighed down by another drop in Nvidia, which fell 5.4 per cent and has tumbled 9.6 per cent over the past two sessions. The company's stock reflects mounting concerns over CEO Jensen Huang's future at the chip company after it initiated an internal probe into spy claims involving Chinese businesswoman Alice Huang.
The CEO's relationship with Alice Huang facilitated the shipment of at least $US7.5 billion ($A10.9 billion) worth of the company's chips through Chinese firms, the Information reported on Tuesday.
But declines for the broader Philadelphia semiconductor index were more muted, down 0.4 per cent, after two consecutive sessions of gains, as volatility in the AI trade increased.
Aside from Waller, multiple other Fed officials speaking on Tuesday also took a hawkish tone.
Dallas Federal Reserve President Lorie Logan said that the Fed needs to deliver at least two more quarter-point interest rate increases to bring down inflation, and may need to do so promptly, while Kansas City Federal Reserve President Jeff Schmid said he believes the current policy rate is "fairly accommodative."
Federal Reserve Vice Chair of Supervision Michelle Bowman, however, stopped short of calling for interest rate hikes, but acknowledged that inflation was the central bank's top priority.
Investors are also bracing for Anthropic's expected public listing later in November. The AI lab revealed that its initial public offering is expected to raise as much as $US64.4 billion ($A93.3 billion), giving the company a fully diluted valuation of up to $US1.4 trillion ($A2) trillion.
A listing by Anthropic could also force other AI heavyweights to compete harder for investor dollars and cause portfolio repositioning by investors.
Neocloud firm CoreWeave shares closed down 0.5 per cent but were up about two per cent in extended trade after it topped Wall Street's revenue estimates on strong demand for its cloud services, easing some recent concerns about the sustainability of the AI boom and the company's debt burden. The stock is down 32 per cent on the year.
Declining issues outnumbered advancers by a 2.27-to-1 ratio on the New York Stock Exchange, and by a 2.26-to-1 ratio on the Nasdaq.
The S&P 500 posted seven new 52-week highs and three new lows while the Nasdaq Composite recorded 59 new highs and 238 new lows.
Volume on US exchanges was 17.08 billion shares, compared with the 18.83 billion average for the full session over the last 20 trading days.
