Stocks fell sharply on Thursday as a hotter-than-anticipated inflation reading and surging oil prices sent Treasury yields soaring to multi-year highs, recalibrating expectations for the Federal Reserve’s upcoming meeting. The market’s focus now shifts squarely to tomorrow’s critical release of the August Consumer Price Index (CPI) report, which could either confirm or challenge the growing consensus for an interest rate hike next week. With the benchmark 10-year yield hitting its highest level in years and the 2-year yield climbing to a new peak, risk assets from equities to corporate bonds felt the pressure as investors repriced the likelihood of further monetary tightening.
Producer Price Index Rises as Energy Costs Surge
The Bureau of Labor Statistics reported that the Producer Price Index (PPI), which tracks prices businesses pay to suppliers, rose 0.4% month over month in August, matching economist forecasts. On an annual basis, headline PPI accelerated to 5.4%, up from the previous month’s reading and driven largely by a spike in energy costs. The core PPI, which strips out volatile food and energy prices, increased 0.2% month over month—a slight deceleration from July’s revised 0.3% gain—but accelerated to 4.6% year over year from 4.2% in July. This data underscores persistent inflationary pressures in the pipeline, particularly as energy prices continue to climb.
Bill Adams, chief U.S. economist at Fifth Third Commercial Bank, noted that the PPI report largely aligned with expectations but highlighted a troubling trend. “August’s hot PPI was largely as expected, lifted by rising energy prices as the Iran war disrupts global supplies,” Adams stated. He added that the core inflation metrics remain sticky, suggesting that underlying price pressures are proving difficult to extinguish. “The surge in energy prices since the turn of the month creates new upside risk for inflation that is not captured by the August PPI report,” he cautioned. Indeed, national diesel prices hit a record high of $5.9773 on Thursday, while front-month West Texas Intermediate crude futures jumped 6.7% to $102.48 per barrel, marking an eight-day winning streak—the longest such run since 2023, according to Dow Jones Market Data.
Fed Rate Hike Odds Rise as Energy Prices Soar
The September Federal Reserve decision, which had appeared finely balanced just weeks ago, now leans more heavily toward a rate hike. Adams explained that the recent energy price surge will likely tip the balance in favor of tightening. “The September Fed decision looked finely balanced” before the recent data, he said, but “September’s surge in energy prices will likely tip the balance towards a hike.” However, he added that “a big surprise from the August CPI report’s release tomorrow or a last-minute deal with Iran could still influence the decision.” Markets are pricing in a 71% probability that the Fed will raise the federal funds rate by a quarter-percentage point at next Wednesday’s meeting, according to CME Group FedWatch data. This marks an increase from 61% just one day prior, reflecting the market’s swift repricing of monetary policy expectations in response to the hot PPI data and soaring oil prices.
Treasury Yields Hit Multi-Year Highs, Stocks Slide
The combination of sticky inflation and higher oil prices sent Treasury yields soaring on Thursday, with the 2-year note closing at its highest point since mid-2024, rising 15.2 basis points to 4.579%. The 10-year Treasury yield also surged, hitting its loftiest level since 2023, climbing 12.3 basis points to 4.963%. These sharp moves in the bond market weighed heavily on equity markets, as rising yields make future corporate earnings less attractive and increase borrowing costs. The blue-chip Dow Jones Industrial Average fell 0.6% to close at 52,064, while the broader S&P 500 dropped 0.6% to 7,591. The tech-heavy Nasdaq Composite declined 0.7% to 26,081, though losses were partially mitigated by gains in several mega-cap stocks.
Despite a fourth consecutive day of losses for the major indices, standout performances from some of the largest companies helped limit the damage. Apple (AAPL) rose 3.6%, Alphabet (GOOGL) gained 0.6%, and SpaceX (SPCX) added 0.4%, providing a counterbalance to the broader selloff. Analysts noted that these defensive mega-cap names often benefit from a flight to quality during periods of market stress. However, the overall tone was decidedly negative, with nine of the eleven S&P 500 sectors closing in the red. Energy was one of the few bright spots, as oil prices themselves continued their relentless climb, boosting shares of producers like Exxon Mobil and Chevron.
AeroVironment Rallies After Strong Earnings Report
In individual stock moves, AeroVironment (AVAV) closed 4.5% higher on Thursday after the drone maker reported better-than-expected fiscal first-quarter results. The company posted a significant beat on both revenue and earnings, driven by strong demand for its defense-tech products. Stifel analyst Jonathan Siegmann described the quarter as “the cleanest prints” for AVAV in recent quarters. He noted that the company is “finally showing substantial, quality backlog build in its key defense-tech franchises—directed energy, counter-drone, and unmanned systems.” The positive reception to the earnings report suggests that investors are increasingly confident in AeroVironment’s ability to capitalize on growing defense budgets and geopolitical tensions.
Oracle Slips Ahead of Highly Anticipated Earnings
Oracle (ORCL) fell 5.2% on Thursday ahead of its fiscal first-quarter earnings report, which was released after the market close. The tech giant is expected to report an 18% year-over-year rise in earnings on 28% revenue growth, driven by continued demand for its cloud computing infrastructure. Mizuho Americas analyst Siti Panigrahi expects the company to exceed estimates, noting that he will be watching for updates on Oracle Cloud Infrastructure (OCI) momentum, revenue performance obligation growth, and clarity on capital expenditures for data center expansion. The stock’s decline ahead of the print suggests that some investors are taking profits after a strong run, but the after-hours reaction will depend on the magnitude of the beat and the tone of management’s forward guidance.
Argan Drops Despite 40% Dividend Increase
Argan (AGX) was another notable mover on Thursday, falling 1.4% despite announcing a sharp 40% increase in its quarterly dividend to 70 cents per share. The energy and industrial infrastructure builder’s new annual payout of $2.80 represents a dividend yield of 0.7% based on Thursday’s closing price. CEO David Watson highlighted strong industry tailwinds, stating, “This is an exciting time for our Company as our industry experiences unprecedented demand for new dispatchable power generation to support the significant load growth driven by data centers, domestic manufacturing, and the broader electrification of the economy.” The announcement marks the company’s fourth consecutive annual dividend hike. Despite the day’s decline, Argan shares have gained nearly 29% year to date on a total return basis, more than doubling the S&P 500’s 12.5% gain over the same period.
As markets digest this week’s inflation data and prepare for next week’s Fed decision, the narrative of persistent inflation and elevated energy costs remains the dominant theme. Investors are now closely watching tomorrow’s CPI report for confirmation or contradiction of the PPI’s signal, as the result could determine whether the central bank delivers another rate hike or adopts a more cautious stance. With yields at multi-year highs and equity valuations under pressure, the coming days will likely set the tone for the remainder of the quarter.
