Dow futures are flat as investors fear inflation will drive the Fed

Stock futures traded flat Wednesday as investors weighed price data that came in higher than expected, signaling more interest rate hikes are ahead as the Federal Reserve looks to tame high inflation.

Futures tied to the Dow Jones Industrial Average added 40 points, or 0.14%. S&P 500 futures and Nasdaq 100 futures were up 0.22% and 0.33%, respectively.

Stock futures pared gains from earlier in the morning when the September producer price index, a gauge of final-demand wholesale prices, came in higher than expected. The print was up 0.4% in September, more than the consensus estimate of a 0.2% increase, according to Dow Jones.

The PPI number is one of the inflation gauges investors are watching alongside the Federal Reserve. If inflation continues to be high, the central bank is more likely to continue its aggressive path of interest rate hikes to bring it back into check. That means rates will continue to rise and my stay high for longer than markets expect, weighing on stocks.

Investors will get more inflation data on Wednesday, when the September consumer price index report is released. The CPI number is a measure of price changes in a basket of common consumer goods and services.

The minutes from the Federal Reserve’s September meeting will also be released Wednesday. While Fed Chairman Jerome Powell has acknowledged that aggressive interest rate increases could be painful, the central bank will continue to charge forward in its fight to lower inflation.

“Powell has repeated, in what has become his mantra, that without price stability we cannot have a strong economy or a strong labor market,” said Quincy Krosby, chief global strategist for LPL Financial. “Investors are concerned that restrictive monetary policy, that is, tighter financial conditions, could lead to the kind of financial accident that dries up liquidity and delivers more harm to the global economy.”

Wednesday’s moves came after the S&P 500 and Nasdaq Composite fell 0.65% and 1.1%, respectively on Tuesday, to post their fifth straight day of declines. The Dow ended the day on a higher note, up about 36 points, but gave back most of its gains from a rally earlier in the session.

Stocks fell from their highs, and bond yields ticked up, when the Bank of England said its market intervention will be over soon and pension funds have just three days to rebalance positions.