Stocks Slip Amid Inflation, Rate Fears

NEW YORK (AP) -- Stocks are slipping on Wall Street Wednesday after a report showed U.S. shoppers opened their wallets at retail stores last month by much more than expected.

The S&P 500 was 0.6% lower in morning trading. The Dow Jones Industrial Average was down 198 points, or 0.6%, at 33,890, as of 10:07 a.m. Eastern time, and the Nasdaq composite was 0.6% lower.

Sales at U.S. retailers jumped more than expected last month, even as shoppers contend with higher interest rates on credit cards and other loans. The surprising strength offers hope that the most important part of the U.S. economy, consumer spending, can stay afloat despite worries about a possible recession looming. It's the latest piece of data to show the economy remains more resilient than feared.

At the same time, though, the strong buying potentially adds more fuel to inflation, which a report earlier this week showed is cooling by less than expected. Upward pressure on inflation could force the Federal Reserve to stay more aggressive in keeping interest rates high.

High rates can drive down inflation, but they also drag on investment prices and raise the risk of a painful recession.

The worries about higher rates and a firmer Fed have been most evident in the bond market, where yields on Treasurys have jumped since a report two Fridays ago showed the U.S. job market remains stronger than expected.

The yield on the two-year Treasury, which tends to track expectations for the Fed, briefly jumped toward 4.70% after the retail sales report, up from less than 4.60% overnight and from 4.62% late Tuesday. It then dropped back to 4.60%, which is still near its highest level since November.

The 10-year yield, which helps set rates for mortgages and other important loans, held steady at 3.75%.

Following Tuesday's data on inflation that was slightly hotter than expected, economists at Deutsche Bank raised their forecast for how high the Fed will take its key overnight interest rate. They now see it ultimately rising to 5.6%, up from their prior forecast of 5.1%.

The Fed has already pulled its overnight rate all the way to a range of 4.50% to 4.75%, up from virtually zero a year ago.

The Deutsche Bank economists said they still expect a recession, but that the near-term strength in the economy could push its timing into the last three months of the year, later than they earlier thought.

Many other traders have also been raising their forecasts for how high the Fed will ultimately take interest rates. They've also sharply reduced bets for the Fed to cut rates late this year.

Even still, stocks are hanging onto healthy gains for the year despite some recent rockiness. The S&P 500 is up 7% as strong data reports build hope that the economy may be able to avoid a recession. Or, if one hits, perhaps it may be only a short and shallow one.

On Wall Street, shares of Airbnb jumped 12.6% after reporting stronger profit and revenue for its latest quarter than analysts expected. It also said trends remain encouraging into the new year, and it gave a forecast for revenue that topped Wall Street's.

On the losing end were stocks of energy producers, which dropped with the price of oil. A barrel of U.S. crude slipped 0.8% to $78.39, while Brent crude, which is the international standard, fell 1.3% to $84.50. Energy stocks in the S&P 500 fell 2.2%, by far the worst performance of the 11 sectors that make up the index.

One of the sharpest drops in the S&P 500 came from Devon Energy, which fell 11.8% after reporting weaker profit for the latest quarter than expected.

This earnings reporting season has been muted, with many companies reporting pressure on their profits from high costs and interest rates.

In stock markets abroad, Turkey's market jumped nearly 10% after trading reopened following a closure caused by the devastating earthquake in the region.

European stocks were modestly higher, with Germany's DAX returning 0.7%. Asian stocks were weaker, with Hong Kong's Hang Seng down 1.4% and South Korea's Kospi down 1.5%.