Hot US inflation data reignites the global sell-off

LONDON (Reuters) – MSCI’s global stock index fell to its lowest level in July 2020 and dollar borrowing costs and the bond market rose on Thursday, as another inflation reading in a scorching United States boosted bets for another big Fed rate hike. Fed next month.

Traders flipped straight into selling mode as the US Labor Department’s CPI report showed the core CPI rising at an annualized pace of 8.2% and the core CPI, eliminating volatile food and fuel prices at 6.6% higher than expected. Read more

It sent Wall Street futures prices down more than 2% as the market opened and the S&P 500 index left (.SPX)European stocks (.stoxx) The MSCI Global Lead Index (.MIWD00000PUS) Every seventh day in a row is red.

Global markets have had a hot few weeks, but US CPI data pared back fears that major economies will need to be pushed hard into recession until inflation is brought under control.

The seemingly unstoppable dollar started to come to life sending the EUR, the yen and the Swiss franc lower/FRX although sterling was still higher following a report that the British government was discussing scrapping further tax cuts put in place just last month.

Economists said the Fed is now expected to raise interest rates, which are currently 3.125%, by at least 75 basis points next month and continue raising them next year. Markets are showing that investors now expect US rates to peak at around 4.85% in March, compared to a peak of 4.65% in May that was priced just before the data.

“Following today’s inflation report, there can be no left in the market to believe that the Fed can raise rates by less than 75 basis points at the November meeting,” said Sima Shah, chief global strategist at Principal Asset Management.

“If this kind of bullish surprise repeats next month, we could face a fifth straight hike of 0.75% in December, as interest rates oscillate across the peak of the Fed’s interest rate forecast before this year ends.”

In the bond markets, borrowing costs are rising again.

The benchmark US 10-year yield jumped above 4% again from 3.89%. Two-year rates were 4.5% while German 10-year bond yields rose to 2.304%, compared to 2.229% just before the US data.

Previous European data confirmed that German harmonized inflation was 10.9% y/y in September and around 10% in Sweden as well.

The minutes of the Fed’s latest policy meeting released on Wednesday showed that many officials “emphasized that the cost of taking too little action to lower inflation likely outweighs the cost of taking too much.”

Many policymakers stressed, however, that it would be important to “calibrate” the pace of further rate increases to reduce the risk of “significant negative effects” on the economy.

Treasury yields have been volatile in Europe. With most one-touch equivalent European returns too.

Markets put a 90% chance of a Fed rate hike of another 75 basis points in November, versus a 10% chance of a half-point jump.

concerned

In Asia, large-scale stock market weakness saw Japan’s Nikkei index (.N225) Down 0.6% and South Korea Kospi (.KS11) Down 1.8% overnight on news of Taiwanese chip giant TSMC (2330.TW) It was seeing a drop in demand and was cutting its investment budget by at least 10% to hurt the tech sector in the broader region. Read more

Hang Seng in Hong Kong (.HSI) It fell 1.9% and the papers of leading companies in the Chinese mainland (.CSI300) It lost 0.3% to leave the MSCI Asia Pacific Index (.MIAP00000PUS.) Approximately 2 1/2-year-old.

“The risks of a bout of hyper-tightening and some mishaps in the financial markets are higher than I can remember,” said Tom Nash, fixed income portfolio manager at UBS Asset Management in Sydney.

heroic

The dollar index, which measures the greenback against six major competitors, jumped more than 0.5% to 113.65 after CPI data.

The US currency hit a 24-year high of 147.2 yen, and pushed the euro to a two-week low. Sterling was still higher after rising nearly 1.5% to $1.1263 on reports of possible changes to tax cuts.

Yields on the 10-year gold-standard bond, which erupted after the UK government laid out tax-cut plans last month, shifted from a fresh 14-year peak of 4.632% to 4.25% in post-CPI trading.

The Bank of England insisted that emergency bond market support would end on Friday as originally announced, in the face of media reports of continued assistance if needed.

Bank of England Governor Andrew Bailey angered markets on Tuesday by saying that British pension funds and other investors were hit hard by falling bond prices until the deadline to fix their problems.

“I would say it’s heroic to say that the risk of some kind of systemic problem has been quelled because these are big moves and we still now still need to deleverage,” said Paul O’Connor of Janus Henderson. “Markets are still feeling very underperforming.”

Meanwhile, crude oil markets regained strength after dropping 2% on Wednesday on demand concerns.

Brent crude futures rebounded 23 cents, or 0.25%, to $92.69 a barrel, while US West Texas Intermediate crude rose 21 cents, or 0.2%, at $87.44 a barrel.

Last week, the Organization of the Petroleum Exporting Countries (OPEC) and allies including Russia pushed prices higher when they agreed to cut supplies by 2 million barrels per day.

Additional reporting by Kevin Buckland in Tokyo; Editing by Kirsten Donovan and Alexander Smith

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