Financials drag Dow, S&P lower as data shows cooling inflation

© Reuters. FILE PHOTO: American flags hang from the facade of the New York Stock Exchange (NYSE) building after the start of Thursday's trading session in Manhattan in New York City, New York, U.S., January 28, 2021. REUTERS/Mike Segar/File Photo

By Ambar Warrick

(Reuters) -The Dow Jones and S&P 500 indexes fell on Tuesday, dragged down by financial stocks, after data showing a slower-than-expected rise in U.S. inflation led to uncertainty over the U.S. Federal Reserve's timeline to taper monetary stimulus.

U.S. stocks have struggled this month as investors worry about the economic recovery amid a surge in cases of COVID-19's Delta variant and the valuation of equities following a lengthy rally.

Data from the Labor Department showed underlying consumer prices rose at their slowest pace in six months in August, suggesting that inflation had probably peaked. July's reading had also shown a slight slowdown in price increase.

But consumer price inflation is still at high levels. Along with strong producer prices last week and some discord among Fed members over when to begin tapering, it meant investors were still uncertain over the policy shift.

"With underlying asset prices and transportation still elevated, there is little reason to believe we will see inflation swiftly return to an acceptable level," said Joshua Mahony, senior market analyst at stock broker IG.

"While we initially saw markets spike on the prospect of a more patient Federal Reserve, we have since seen traders realize that today's data is unlikely to push the Fed to change course."

Focus is also on the potential passage of U.S. President Joe Biden's $3.5 trillion budget package, which is expected to include a proposed corporate tax rate hike to 26.5% from 21%.

At 11:57 am the Dow Jones Industrial Average fell 179.54 points, or 0.51% , to 34,690.09, the S&P 500 lost 7.20 points, or 0.16 %, to 4,461.44 and the Nasdaq Composite gained 29.65 points, or 0.20%, to 15,136.31.

"We are in a seasonally cautious atmosphere, so I don't expect big gains or declines either way. But I expect a market that's trying to stabilize and will begin to focus on the macro scene, and less on the threat of Delta," said Peter Cardillo, chief market economist at Spartan Capital Securities in New York.

Market participants are expecting a substantial correction in stock markets by the end of the year, with some investors turning bearish on a global economic recovery, a Bank of America (NYSE:BAC) survey showed.

Financial stocks tumbled 1.2%, tracking a drop in Treasury yields. [US/]

Major technology and healthcare stocks, however, marked small gains, supporting the Nasdaq as investors pivoted to relatively safer sectors. Apple Inc (NASDAQ:AAPL) rose 0.4% ahead of the widely anticipated launch of a new iPhone later in the day.

Among individual stocks, CureVac fell nearly 5% after the German biotechnology firm canceled manufacturing deals for its experimental COVID-19 vaccine with two prospective partners, after rivals with approved shots boosted production.

Declining issues outnumbered advancers by a 1.5-to-1 ratio on the NYSE and by a 1.4-to-1 ratio on the Nasdaq.

The S&P 500 posted 2 new 52-week highs and one new low while the Nasdaq recorded 58 new highs and 67 new lows.