Wall Street stocks and government bond prices fell on Thursday after data showed the rate of US inflation hit a 40-year high in January.
The latest hot consumer price index print prompted traders to bet on more aggressive action from the Federal Reserve, with six quarter-point interest rate increases priced into the market for 2022. With higher rates and therefore higher borrowing costs, on the horizon, US stocks stumbled.
The broad-based S&P 500 index closed down 1.8 per cent, pulled lower by the real estate and tech sectors, while the technology-heavy Nasdaq fell 2.1 per cent. The S&P 500 real estate sub-index had its worst day in more than a month, dropping 2.9 per cent, as higher interest rates feed into mortgages.
US government debt also came under renewed selling pressure. The yield on the two-year Treasury note, which moves inversely to its price and closely tracks interest rate expectations, rose by as much as 0.27 percentage points to 1.64 per cent, its highest level since December 2019.
The 10-year Treasury note, which moves with inflation and economic expectations, rose to a high of 2.05 per cent, breaching 2 per cent for the first time since August 2019.
Though the move in 10-year yields was significant, the biggest changes were in shorter-dated notes suggesting that the market’s focus on Thursday was more on the Fed’s potential policy reaction to inflation rather than inflation itself.
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US consumer prices rose at an annual pace of 7.5 per cent last month, higher than the 7.3 per cent forecast by analysts and marking the fastest pace since 1982. The month-on-month inflation rate hit 0.6 per cent in January, higher than the 0.5 per cent figure expected by economists.
“The bond market is being brought kicking and screaming into this rate hiking cycle,” said Tom Graff, head of fixed income at Brown Advisory.
Across the Atlantic, the yield on Germany’s 10-year Bund, which last month traded in positive territory for the first time since 2019, added 0.07 percentage points to rise to 0.28 per cent.
The yield on Italy’s 10-year bond, which is viewed as particularly sensitive to rising rates because of the government’s high debt, rose 0.14 percentage points to 1.89 per cent.
In European equity markets, the Stoxx 600 index dipped 0.2 per cent, after closing 1.7 per cent higher in the previous session. London’s FTSE 100 added 0.4 per cent.
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A late rally pushed the dollar to a 0.2 per cent gain for the day against a basket of its peers. Brent crude settled at $91.41, a 0.2 per cent increase from the previous close. Source: FinancialTimes