Wall Street stocks and US government bonds dropped after data showed the US inflation rate jumped to a 13-year high, heightening concerns that the Federal Reserve will be forced to tighten monetary policy.
The S&P 500, which hit an all-time high last Friday, sank 1.7 per cent at lunchtime in New York, to take the blue-chip index’s fall for the week to more than 3 per cent.
The Nasdaq Composite index, which is stacked with highly valued tech companies that are seen as more sensitive to changes in monetary policy, lost 2.3 per cent to trade more than 7 per cent below its April 27 record close.
US government debt also sustained selling pressure, sending the yield on the 10-year Treasury note up 0.06 percentage points to 1.69 per cent. More vigorous inflation makes bonds less appealing given it erodes the value of the fixed coupon payments they provide. The dollar, as measured against a basket of trading partners’ currencies, rose 0.7 per cent.
Data on Wednesday showed consumer prices in the US advanced 4.2 per cent in April, year on year, the most rapid price increase since 2008 and higher than analysts’ expectations of a 3.6 per cent gain.
Core inflation, which strips out changes in energy and food prices, rose 0.9 per cent in April from March, the largest monthly increase since 1982, according to the US labour department. Prices rose for used cars, furniture and rental accommodation along with airline tickets and leisure activities.
Global equity markets have been under pressure this week as concerns mount that rising consumer prices fuelled by the strong economic rebound from the Covid-19 crisis could lead the Fed to reduce its $120bn of monthly bond purchases that have boosted asset prices throughout the pandemic.
“Markets are intensely focused on inflation because if it really does accelerate into this time next year, that will force central banks into removing accommodation,” said David Stubbs, global head of market strategy at JPMorgan Private Bank.
Brent crude, the international oil benchmark, rose 1.7 per cent to $69.69 a barrel on Wednesday as commodities traders cheered the latest sign of a strong recovery in the world’s largest economy.
The UK’s FTSE 100, which has a large concentration of energy stocks, closed up 0.8 per cent, while the pan-European Stoxx 600 index added 0.3 per cent, with its oil and gas sub-index gaining 2 per cent.
The euro dropped 0.6 per cent against the dollar to purchase $1.2073.
Despite the market jitters over the CPI data, Fed policymakers have regularly said they will allow inflation to overshoot the central bank’s 2 per cent target to allow time for the pandemic-scarred labour market to recover.
On Wednesday Fed vice-chair Richard Clarida said he expected price rises to exceed the target for “the next few months” because of “transitory factors” such as bottlenecks in global supply chains caused by industry shutdowns a year ago.
“The Fed’s focus is likely to remain on seeing further progress on the labour market, though the pressure to start discussing the appropriate timing of tapering will increase,” said Emiel van den Heiligenberg, head of asset allocation at Legal & General Investment Management.
“Central banks for the time being are keeping a level of credibility with the markets,” added Nadège Dufossé, head of cross-asset strategy at French fund manager Candriam. “If inflation is surprisingly high and stays that way into the autumn, there will be more questions about tapering and how orderly that will be.”