Global stock market sell-off continues as American consumer prices rise at fastest rate in a decade

by Jonathan Adams

The FTSE 100 has dropped by over 2% in early trading this morning after inflation data out of the USA yesterday reinforced concerns governments may be forced into turning off the stimulus taps. The American headline consumer price index (CPI) was yesterday showed to have grown 4.2% on an annual basis, the largest yearly rise since 2008 and well ahead of expectations for 3.6%.

Quickening inflation data out of the USA comes hot on the heels of increases in the price of goods manufactured by Chinese factories, which were also ahead of forecasts earlier in the week.

ftse 100 index

Deepening investor jitters saw the major Wall Street indices suffer losses again yesterday with Benchmark Treasury yields jumping in the opposite direction as markets lost their risk appetite. The yield on 10-year Treasuries last night rose above 1.69% to their highest level in a month. The dollar also strengthened, up 0.56% against the basket of six other leading currencies. The U.S. dollar typically strengthens when markets get nervous and investors look for a safe haven to park their cash.

Tech stocks, which have seen the strongest gains over the long-running bull market of the last decade and especially last year, were again hit hardest yesterday. The tech-heavy Nasdaq was down 2.7% yesterday compared to 2.15% for the S&P 500 and 2% for the broad-based Dow Jones industrial average.

The valuations of technology and other growth stocks have become increasingly forward-looking over recent years and are much more focused on how much money companies could make in future years. That makes them particularly sensitive to inflation, which reduces the present value of future cash flows.

Policymakers continue to express the view currently increasing inflation will prove to be temporary and naturally wind-down as Covid-19 pandemic restrictions fall away, giving people more things to spend their money on and increasing competition.

Federal Reserve vice-chairman Richard Clarida yesterday insisted that the USA’s central bank would not be scaling back its stimulus measures for “some time”, adding that the inflation report represents only one data point. President Biden has also recently resisted suggestions the U.S. economy is overheating and Fed chairman Jeremy Powell emphatically said he is not even “thinking about thinking” of raising interest rates any time soon.

Despite the assurances, investors are showing signs they are not entirely convinced we won’t see the kind of extended rise in inflation that would ultimately force policymakers into acting by tightening the loose monetary policy initiated to manage economies through the pandemic.

This article is for information purposes only.
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