US equities slide as CPI hits three-year high and Middle East tensions escalate
The Nasdaq and Dow fell roughly 1.2% as markets digest hotter-than-expected inflation data and escalating geopolitical risks, while the Bank of Canada holds rates steady.
US equity markets suffered a sharp sell-off on Wednesday, with the Nasdaq Composite and Dow Jones Industrial Average each dropping approximately 1.2%, while the S&P 500 declined 0.9%. The downturn was driven by the release of the May Consumer Price Index (CPI) report, which revealed annual inflation rising to 4.2%, the highest level since May 2023. Simultaneously, geopolitical tensions escalated following renewed military strikes between the United States and Iran, causing oil prices to rise and casting doubt on ongoing peace negotiations.
The inflation data was largely propelled by a 23.5% year-on-year surge in energy prices, a marked acceleration from the 17.9% increase recorded in April. This spike in energy costs has heightened market expectations that the Federal Reserve will raise interest rates this year. Core inflation, which excludes volatile food and energy categories, rose 2.9% annually, adding further pressure on policymakers to maintain a restrictive monetary stance.
Geopolitical instability intensified after the United States launched airstrikes against Iranian targets in response to the downing of a US Army Apache helicopter over the Strait of Hormuz. The conflict has disrupted regional security, with Jordan, Bahrain, and Kuwait acknowledging attacks within their borders. Consequently, futures on Brent crude rose nearly 3% to cross above $94 per barrel, while US WTI crude gained 3.5% to trade above $91, reflecting the immediate supply risks posed by the renewed hostilities.
In response to the global economic uncertainty, the Bank of Canada maintained its target interest rate at 2.25% for the fifth consecutive time. The central bank cited widespread instability stemming from US trade relations and the Iran conflict as key factors. The Governing Council noted that while Canadian CPI inflation rose to 2.8% in April, economic activity remained weak, with GDP falling by 0.1% in the first quarter, underscoring the domestic impact of external shocks.
The technology sector faced additional headwinds as concerns mounted over the sustainability of the AI trade. Semiconductor stocks, including Nvidia and Broadcom, fell significantly, while investors awaited Oracle’s earnings report. The company’s results are closely watched as a bellwether for AI demand, given its substantial cloud infrastructure contracts with OpenAI. Meanwhile, the upcoming initial public offering of SpaceX is expected to draw significant retail interest, potentially shifting capital flows within the market.
