Wall Street set for muted open after rout

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By Ankika Biswas and Devik Jain

(Reuters) -Wall Street was set for a subdued open on Wednesday following a sharp selloff in the previous session after red-hot inflation data fanned worries about how much and how long the Federal Reserve will hike interest rates.

The three major indexes on Tuesday posted their biggest one-day percentage declines since June 2020, as the consumer price report cemented bets that the U.S. central bank will go ahead with its third straight 75 basis points increase in rates next week.

Markets are also pricing in a 37% chance of a massive 100 bps increase by the central bank, and expects rates to peak at 4.34% by March 2023.

In the latest data, monthly U.S. producer prices dipped 0.1% in August, while it rose 8.7% year-on-year in August from 9.8% in July. Economists polled by Reuters had forecast the PPI edging up 0.1% and increasing 8.8% year-on-year.

Excluding the volatile food, energy and trade services components, core producer prices rose by higher-than-expected 7.3%. Markets are now likely to look forward to the monthly retail sales data on Thursday.

"After yesterday's sell-off, just about anything would be welcome. And what we see is that the producer price index numbers came in pretty much as expected," said Hugh Johnson, chief economist of Hugh Johnson Economics in Albany, New York.

"It's fairly clear now that they're (Fed) going to raise interest rates by 75 basis points at the September meeting. The expectation is for 50 basis point rate hike in November and maybe another 25 in December."

Stocks had rallied ahead of the inflation data as easing commodity prices, especially oil, had raised hopes the Fed would scale back its aggressive policy tightening even as policymakers reiterated their determination to bring inflation to their 2% target through rate hikes.

Growing expectations for a more hawkish Fed are an unwelcome development for a market already contending with worries that the central bank's efforts to tame inflation could tip the economy into a recession.

September, which is a seasonally-weak period for markets, will also see the Fed ramp up the unwinding of its balance sheet to $95 billion per month, a move some investors worry may add volatility in markets and weigh on the economy.

"With the federal funds rate poised to be above 3% after next week's meeting and QT running at full speed, Fed officials may finally start to feel that the pace of tightening can moderate in Q4 and beyond," Wells Fargo (NYSE:WFC) economists wrote in a note.

"That said, there is a big difference between slowing the pace of tightening and a full-blown policy pivot."

At 8:40 a.m. ET, Dow e-minis were up 50 points, or 0.16%, S&P 500 e-minis were up 11 points, or 0.28%, and Nasdaq 100 e-minis were up 42.5 points, or 0.35%.

The CBOE volatility index, also known as Wall Street's fear gauge, rose to 27.18 points, inching closer to a two-month high hit on Tuesday.

Rate-sensitive shares of technology and growth companies such as Tesla (NASDAQ:TSLA) Inc, Apple Inc (NASDAQ:AAPL), Amazon.com (NASDAQ:AMZN), Meta Platforms, Alphabet (NASDAQ:GOOGL) Inc and Microsoft Corp (NASDAQ:MSFT) were mixed in premarket trading after leading declines on Tuesday.