Wall Street sells off as rate hike expectations rise

By Lewis Krauskopf

(Reuters) - Wall Street sold off on Tuesday as investors boosted chances of an interest rate hike later this year after data pointed to firming inflation, while Home Depot weighed after its quarterly report.

U.S. consumer prices recorded their biggest increase in more than three years in April as gasoline and rents rose. The data pointed to a steady inflation build-up that could give the Federal Reserve ammunition to raise interest rates later this year.

Two Fed policymakers on Tuesday said the central bank could still raise interest rates two or three times this year.

Traders now see the probability of a rate hike after the Fed's November meeting at 55 percent, up from roughly 42 percent on Monday, according to the CME FedWatch tool.

"This morning the economic news was generally favorable suggesting that ... the U.S. economy has improved to levels warranting something other that crisis-level rates," said Terry Sandven, chief equity strategist at U.S. Bank Wealth Management in Minneapolis.

The major U.S. stock market indexes slid back after rallying sharply on Monday.

The S&P 500 is little changed in 2016. While the benchmark index has risen about 13 percent since February lows, the rally fizzled out in the last few weeks amid mixed corporate earnings and economic data.

"We seem completely unable to break out of the ranges this year," said Rick Meckler, president of investment firm LibertyView Capital Management in Jersey City, New Jersey. "For every step forward in the market like yesterday, it just seems like it's met with a step back on a day like today."

The Dow Jones industrial average was down 178.78 points, or 1.01 percent, to 17,531.93, the S&P 500 had lost 19.87 points, or 0.96 percent, to 2,046.79 and the Nasdaq Composite had dropped 53.93 points, or 1.13 percent, to 4,721.53.

Utilities <.SPLRCU> and consumer staples <.SPLRCS>, both high-dividend-paying groups that tend to be sold when the expectation of higher rates increases, were the worst performing S&P sectors. All ten sectors were lower.

Home Depot boosted its sales and profit forecasts for the year after a stronger-than-expected first quarter. But its shares, which have outperformed the consumer discretionary sector over the past year and last week touched an all-time high, dropped 2.7 percent in afternoon trading and were among the biggest drags on the S&P 500 and the Dow.

Gloomy reports from retailers had clouded the market last week. Wal-Mart and Target are set to report results later this week.

AbbVie was down 4.9 percent at $59.41 after Coherus said the U.S. Patent and Trademark Office agreed to review its petition to make a copy of AbbVie's top-selling drug. Coherus was up 13.9 percent at $18.53.

Declining issues outnumbered advancing ones on the NYSE by 1,921 to 1,052, for a 1.83-to-1 ratio on the downside; on the Nasdaq, 1,901 issues fell and 883 advanced for a 2.15-to-1 ratio favoring decliners.

The S&P 500 posted 7 new 52-week highs and 5 new lows; the Nasdaq recorded 18 new highs and 66 new lows.

(Additional reporting by Yashaswini Swamynathan and Tanya Agrawal in Bengaluru; Editing by Nick Zieminski)