US stocks fall as retail sales add to rate uncertainty, banks drop

By Amruta Khandekar, Shristi Achar A and Saeed Azhar

(Reuters) – Wall Street’s main stock indexes fell on Tuesday after stronger-than-expected retail sales data stoked worries interest rates could stay higher for longer, while U.S. big banks dropped on a report that Fitch could downgrade some lenders.

The Commerce Department’s report showed retail sales grew 0.7% last month against expectations of a 0.4% rise, suggesting the U.S. economy remains strong.

After the data, traders’ bets of a pause on hikes by the Federal Reserve next month stayed intact at 89%, yet analysts said investors were worried rates could stay at current levels longer than anticipated.

Banks saw the brunt of the selling as investors grew more anxious about interest rate uncertainty. The U.S. Treasury yield curve inverted, with longer-term bonds yielding less than short-term debt instruments. This unusual situation pressures profits that banks can earn on loans.

“We would probably end up with an inverted yield curve for longer than anticipated, even if we don’t end up with an economic recession,” said Sam Stovall, chief investment strategist at CFRA Research.

“That would end up curtailing lending because even if you were my brother-in-law, I wouldn’t want to lend to you at a loss.”

A report said ratings agency Fitch could downgrade multiple banks. Shares of JPMorgan Chase (NYSE:), Bank of America (NYSE:) and Wells Fargo (NYSE:) fell between 2.3% and 2.9%.

“The story from Fitch about potential downgrades to multiple U.S. banks (is) weighing on sentiment,” said Michael James, managing director of equity trading at Wedbush Securities.

“You combine that with the retail sales figures this morning that we’re a little hotter than estimates, (it) furthers the potential higher for longer rates scenario from the Fed.”

Shares of regional lenders PacWest Bancorp, Zions Bancorp and Western Alliance (NYSE:) Bank fell between 3.2% and nearly 5% after the Federal Deposit Insurance Corp’s latest regulatory overhaul proposal.

The banking index hit a one-month low, last down 2.65%, while the KBW regional banking index slipped 3.25%.

All major 11 S&P 500 sectors declined, with energy stocks leading losses on weaker crude prices. [O/R]

Technology stocks fared better, thanks to a 1.6% rise in shares of Nvidia (NASDAQ:) after UBS and Wells Fargo lifted their price targets on the stock.

Nvidia had posted its biggest one-day percentage gain since late May in the previous session following bullish comments from Morgan Stanley (NYSE:), with analysts also saying investors were piling into the stock in the run-up to its earnings next week.

U.S.-listed shares of Chinese companies also dropped with e-commerce firm Alibaba (NYSE:) Group sliding 2.2% after another round of disappointing economic data from China which prompted Beijing to cut key policy rates.

At 2.08 pm ET, the S&P 500 was down 40.26 points, or 0.90%, to 4,449.46 and the dropped 111.85 points, or 0.81%, to 13,676.49, while the fell 297.51 points, or 0.84%, to 35,010.12,

Among other stocks, General Motors (NYSE:) fell almost 2% after Berkshire Hathaway (NYSE:) cut its stake in the automaker.

Warren Buffett’s Berkshire disclosed a new investment in homebuilder D.R. Horton, whose shares rose 3.3%, and Lennar Corp (NYSE:), which rose 2.2%.

Declining stocks outnumbered rising ones within the S&P 500 by a 9.7-to-one ratio.

The S&P 500 posted 3 new highs and 17 new lows; the Nasdaq recorded 40 new highs and 178 new lows.