The stock market fell Wednesday following still-strong economic data and the start of the Federal Reserve’s “quantitative tightening.”

The


Dow Jones Industrial Average

fell 177 points, or 0.5%, while the


S&P 500

dropped 0.8%, and the


Nasdaq Composite

decreased 0.7%. Stocks tried to rally in the afternoon but ultimately stumbled into the close.

“US stocks turned negative as expectations grew that the Fed won’t be easing up on its rate-hiking campaign after… solid US economic data,” writes Edward Moya, senior market analyst at Oanda.

The declines come even after all three major indexes ended Tuesday in the red, amid concerns that the European Union’s new plans for restrictions on Russian oil would cause oil prices to head meaningfully higher. On Wednesday, WTI crude oil rose to $ 114 a barrel, and it has climbed more than 12% in the past month.

Now, markets are poring over several pieces of economic data, which may have implications for inflation and the Fed’s plans for raising interest rates.

The latest was the Institute for Supply Management’s manufacturing index. It came in at 56.1 for May, up from 55.4 in April, with any reading above 50 representing growth in activity. New orders grew, suggesting manufacturers are expecting strong demand even with rising interest rates, writes Citigroup economist Andrew Hollenhorst.

The hot manufacturing number could easily portend inflation remaining fairly high, and that, in turn, could mean the Fed sticks to its plan of lifting interest rates far faster than it typically has in recent years.

On the employment front, job openings remained near record levels in April, with 11.4 million positions open, the Labor Department reported on Wednesday. Recently, there have been about 1.9 openings for every unemployed person, according to 22V Research. That’s the type of dynamic markets want to see go away. Businesses, eager to hire, are having to pay higher wages, which then forces them to lift prices, contributing to overall inflation.

The bond market didn’t take too kindly to both pieces of data. The 2-year Treasury yield, which attempts to forecast the level of the federal-funds rate a couple of years from the present, rose to 2.66%, a level it hasn’t hit in a couple of weeks.

There’s more data to come. Jobless claims are due Thursday, and then the May jobs report will be released Friday. Economists are looking for 328,000 jobs to have been added, which would be below the 428,000 jobs added in April. Markets want to see a strong jobs number, which indicates a strong economy — but not too strong, which would be a sign that the Fed still needs to do more to slow the economy to combat inflation. A number too far ahead of expectations could also point to still-high inflation, as more people would be earning incomes and spending.

That’s been a focal point for the market recently. The latest inflation data showed that the rate of price increases has slowed down, much to the delight of the stock market, as this indicates that the Fed could soon slow down the pace of interest rate hikes. Now, markets — and the Fed — need to see continued evidence that inflation won’t remain too high.

That evidence hasn’t shown up this week, and the market could be bracing for some negative news on that front, as stocks have rallied in recent weeks. The S&P 500 is up about 8% from its intraday low of the year, hit on May 20.

“May is finally over, but inflation worries, the war, and high energy prices welcome the new month with us,” wrote Ipek Ozkardeskaya, senior analyst at Swissquote Bank.

Consistent with high inflation, the Fed begins reducing its balance sheet today. In a process called quantitative tightening, the Fed will not reinvest set amounts of interest income back into the bond market. Less money moving into bonds lowers their prices and lifts their yields, making them more attractive to investors. Already, the 10-year Treasury yield is up to 2.93%, from 1.51% at the end of 2021, which has contributed to some of the decline in stocks this year.

The good news: The bond market may have already reflected the Fed’s balance sheet reduction. It may well be that the worst of the bond market sell-off and volatility [of] rate expectations are already behind us, ”writes Jonas Goltermann, senior economist at Capital Economics.

Still, it’s anybody’s guess whether the reduced demand for bonds from the implementation of the balance sheet reduction will cause the 10-year yield to pop again. That would be a problem for the stock market.

“The elephant in the room is that today the Fed begins to reduce its $ 9 trillion balance sheet, something the market has very little experience with,” writes Louis Navellier, founder of Navellier & Associates.

Overseas, the pan-European


Stoxx 600

dropped 1%, and Hong Kong’s


Hang Seng Index

lost 0.6%.

Here are five stocks on the move Wednesday:

Salesforce

(ticker: CRM) stock shot up 9.9% after the business software company raised forecasts for adjusted fiscal-year earnings.

The company reported a profit of 98 cents a share, beating estimates of 94 cents a share, on sales of 7.41 billion, above expectations for 7.38 billion. The company guided for full-year EPS of 4.75 at the midpoint of its range, noting that its operating margin will grow as it controls costs even while growing sales. This was good news for a stock that had already been beaten down for the year. “

Salesforce

delivered a much better than feared April quarter and guidance which will be a major relief for tech investors, ”wrote Wedbush Securities analyst Dan Ives.

Capri Holdings

(CPRI) stock gained 1% after the company reported a profit of $ 1.02 a share, beating estimates of 82 cents a share, on sales of 1.49 billion, above expectations for 1.41 billion. The company announced a new $ 1 billion stock buyback program.

Victoria’s Secret

(VSCO) stock rose 9.5% after the company reported a profit of $ 1.11 a share, beating estimates of 84 cents a share, on sales of 1.48 billion, in line with expectations.

Amazon.com

(AMZN) rose 1.2% after JPMorgan called the stock its best e-commerce idea.

Park Hotels & Resorts

(PK) stock gained 3% after getting upgraded to Buy from Hold at Truist.

Write to Jack Denton at jack.denton@dowjones.com and Jacob Sonenshine at jacob.sonenshine@barrons.com

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