The Dow, S&P 500, and Nasdaq All Fell 0.4% on Oil and Inflation

Wholesale prices came in hot on Thursday morning, oil kept climbing, and the market did the math. Odds of a Fed rate hike next week jumped to 70%.

The Dow Jones Industrial Average (DJINDICES: ^DJI) dropped 0.4% as of 11:53 a.m. ET, matching the Nasdaq Composite (NASDAQINDEX: ^IXIC) and the S&P 500 (SNPINDEX: ^GSPC). The major indexes started the day in different moods, but are now a rounding error away from identical.

^DJI data by YCharts

Oil at $105 may force the Fed's hand

Producer prices rose 5.4% from a year ago in August, up from 4.8% in July. Core wholesale prices, excluding food and energy, climbed 4.6% annually against 4.2% in July. The eye-catching figure is diesel, up 24.1% in a single month and about 78% over the year, which matters because almost everything on a store shelf rode a truck at least part of the way.

Crude kept climbing while the inflation report landed. Brent climbed about 3.5% past $105 a barrel, its first visit since May, and U.S. crude crossed $100. The United States Oil Fund (NYSEMKT: USO) rose 4.5% and was one of the very few things in the green this morning.

Image source: Getty Images.

Traders responded immediately. CME Group's FedWatch gauge put the odds of a rate hike at the Sept. 15-16 meeting at 70%, and the probability of a second increase by December rose to roughly 60%. The European Central Bank set a global example by hiking its benchmark interest rate by a quarter point this morning. The European bank pointed to the Iran war for its worsening inflation outlook. Will the American Fed focus on the same signals?

Among individual stocks, Nvidia (NASDAQ: NVDA) was the heaviest weight on both the S&P 500 and the Nasdaq Composite after a 2.1% fall. Memory stocks backed down from a winning Wednesday, with Micron Technology (NASDAQ: MU) down 4.1% and SK Hynix (NASDAQ: SKHY) off by 2.7%.

Apple (NASDAQ: AAPL) dared to move the other way, gaining 1.4% and adding 27 Dow points, one day after the foldable iPhone launch sent it down 1.1%. The new devices didn't debut to thunderous applause, but Wall Street is drawing different conclusions today.

Friday morning decides everything

The Consumer Price Index (CPI) arrives Friday morning, the final inflation reading before the Fed convenes. Economists expect a 3.4% headline reading and 2.4% at the core.

That single number carries the meeting. Fed governor Christopher Waller has said he'd back holding steady if prices are cooling. Chair Kevin Warsh wants proof that underlying inflation is actually heading down to 2%. Bank of America ran the numbers on Thursday's producer data and thinks that core PCE is tracking at 0.3% for the month, which greenlights a hike in the massive bank's eyes.

Investors watching the tape should note where the pain landed. Rate-sensitive names took most of the beating while defensive consumer goods stocks held up pretty well. Gold and Bitcoin (CRYPTO: BTC) both fell, which is strange on an inflation-scare day and suggests that fears about fundamental rate increases are overshadowing concerns about currency debasement. If that's an unfamiliar term, debasement is the fear that dollars themselves lose value as federal debt piles up.

That's four down days in a row, but the moves have been rather small -- the S&P 500 is still less than 3% below its all-time peak. Friday morning decides whether it stays there.

Bank of America is an advertising partner of Motley Fool Money. Anders Bylund has positions in Bitcoin, Micron Technology, and Nvidia. The Motley Fool has positions in and recommends Apple, Bitcoin, Micron Technology, and Nvidia. The Motley Fool has a disclosure policy.