By Sinéad Carew and Shristi Achar A
(Reuters) - Wall Street's three major averages closed lower on Wednesday with the Nasdaq's 1% loss leading declines after stronger-than-expected services sector data fueled concerns that still sticky inflation would mean that interest rates stay higher for longer.
The Institute for Supply Management (ISM) said on Wednesday its non-manufacturing Purchasing Managers' Index rose to 54.5 last month against expectations of 52.5, while a gauge of prices paid by service-sector businesses for inputs increased.
Traders were betting on a 93% chance that the Federal Reserve would leave interest rates unchanged after its meeting on Sept. 20, while bets on another pause in November were around 57%, CME Group's (NASDAQ:CME) FedWatch Tool showed.
"The stronger-than-expected ISM services data shows that investors are still not very skilled at reading the post-pandemic tea leaves," said Carol Schleif, chief investment officer at BMO's family office in Minneapolis.
While market participants have been hoping for interest rate cuts soon, Schleif said the data shows a strong economy and inflation that is not coming down "as fast as the Fed would need to start cutting rates any time in the foreseeable future."
Earlier in the day Boston Fed President Susan Collins stressed the need for the central bank to "proceed carefully" with its next monetary policy steps.
The prospect of higher rates put particular pressure on growth stocks with the S&P 500 growth index underperforming the benchmark throughout the session. Equity investors were also reacting to rising yields in 10-year and the two-year U.S. Treasuries.
"Growth stocks have been pricing in the idea that inflation has been well anchored and that the Fed's going to cut. If that idea no longer holds they're going to be vulnerable," said Patrick Kaser, portfolio manager from Brandywine Global.
On top of rate concerns, Apple Inc (NASDAQ:AAPL), which finished down 3.6%, was pressured by a report that China had banned officials at central government agencies from using iPhones and other foreign-branded devices for work.
The Dow Jones Industrial Average fell 198.78 points, or 0.57%, to 34,443.19, the S&P 500 lost 31.35 points, or 0.70%, at 4,465.48 and the Nasdaq Composite dropped 148.48 points, or 1.06%, to 13,872.47.
Of the S&P 500's 11 major industry sectors, growth-heavy technology was the biggest decliner, losing 1.4%, while defensive utilities led gains, up 0.2%. Energy was the only other gainer, up 0.1% with support from higher oil prices.
Oil futures settled up on Wednesday, adding to recent gains, which fueled concerns about inflationary pressure.
The S&P 500 showed little reaction to the Fed's "Beige Book" snapshot of the U.S. economy a week ahead of the keenly awaited August inflation data and the Fed's rate decision on Sept. 20.
The report showed "modest" U.S. economic growth in recent weeks while job growth was "subdued," and inflation slowed in most parts of the country.
Lockheed Martin (NYSE:LMT) shares sank 4.8% after the U.S. weapons maker trimmed the delivery outlook for its F-35 jets.
Roku shares rose 2.9% after the company said it would reduce its workforce by about 10% and limit new hiring.
Declining issues outnumbered advancers on the NYSE by a 2.05-to-1 ratio; on Nasdaq, a 1.97-to-1 ratio favored decliners.
The S&P 500 posted six new 52-week highs and 25 new lows; the Nasdaq Composite recorded 34 new highs and 174 new lows.
On U.S. exchanges 9.39 billion shares changed hands compared with the 10.17 billion moving average for the last 20 sessions.