US stocks closed lower on Tuesday, as a hotter-than-expected inflation reading hardened expectations for a rate hike from the Federal Reserve next month and fuelled concerns the US central bank may be more aggressive in raising rates.

The US Labour Department said the Consumer Price Index increased 0.4 percent last month, its third straight gain of 0.4 percent or more and above the 0.3 percent estimate of economists polled by Reuters, after advancing 0.6 percent in September.

The data came after Fed Governor Christopher Waller said the central bank should raise short-term borrowing costs in December even if data showed inflation cooled last month, and should consider an upsized half-point rate hike if the inflation picture worsens.

Markets are now completely pricing in a rate hike of at least 25 basis points at the Fed's December meeting, according to CME FedWatch, up from 84 percent on Monday, while expectations for a 50 basis point increase climbed to 11.8 percent after garnering no consideration at all in the prior session.

The 2-year US Treasury yield, which typically moves in step with interest rate expectations for the Fed, surged nearly 18.9 basis points to 4.736 percent and was poised for its biggest daily gain since April 9, 2025, after US President Donald Trump launched sweeping global tariffs.

The jump in yields has come even as oil prices have eased to two-month lows as US officials have downplayed any imminent military actions against Iran.

"What kind of has the market spooked a little bit is this idea of, 'Well, we were already pricing in a December hike... but maybe it's not 25, maybe it's 50, and maybe the Fed's more worried about inflation than I am, so let's sell some stocks,'" said Jason Ware, chief investment officer at Albion Financial Group in Salt Lake City, Utah.

"From our perch, that is irrational. The thing that has pushed CPI up over the last six months and has the Fed a little bit more concerned and therefore has restarted hiking rates is because we've seen oil, energy and diesel push through in terms of inflation. If we have oil now going the other way ... this is all going to settle down."

The Dow Jones Industrial Average fell 157 points, or 0.3 percent, to 52,231, the S&P 500 lost 29 points, or 0.4 percent, to 7,520 and the Nasdaq Composite lost 187 points, or 0.7 percent, to 25,065.

The S&P 500 and Nasdaq had risen for two straight days, bouncing back from sharp losses last week sparked by concerns about the potential for government regulations slowing the AI buildout.

But the S&P 500 technology sector dropped 1.4 percent on Tuesday as the worst-performing of the 11 major sectors, weighed down by another drop in Nvidia, which fell 5.4 percent and has tumbled 9.6 percent over the past two sessions. The company's stock reflects mounting concerns over CEO Jensen Huang's future at the chip company after it initiated an internal probe into spy claims involving Chinese businesswoman Alice Huang. China has dismissed the spying allegations as a smear campaign.

Investors are also bracing for Anthropic's expected public listing later this month. The AI lab revealed that its initial public offering is expected to raise as much as US$64.4 billion, giving the company a fully diluted valuation of up to US$1.4 trillion.

A listing by Anthropic could also force other AI heavyweights to compete harder for investor dollars and cause portfolio repositioning by investors.

Neocloud firm CoreWeave shares closed down 0.5 percent but were up about 2 percent in extended trade after it topped Wall Street's revenue estimates on strong demand for its cloud services, easing some recent concerns about the sustainability of the AI boom and the company's debt burden. The stock is down 32 percent on the year. (Reuters)



Edited by Cecil Wong