The prospect of tighter monetary policy knocked shares down and the stock market extended losses through the day
US stocks suffered the biggest slump in at least 11 weeks on Wednesday, May 12, and benchmark Treasury yields jumped after data showed consumer prices in April unexpectedly rose by the highest level in nearly 12 years, prompting bets on earlier interest rate hikes.
A 0.8% jump in the US consumer price index – outpacing a 0.2% forecast – bolstered the US dollar as expectations of rising real interest rates brightened the currency’s appeal.
The gyrations in financial markets underscored worries among some investors that the Federal Reserve could be wrong in its prediction that inflation pressures in the United States are temporary, and that the central bank may have to increase rates sooner than it expects.
The prospect of tighter monetary policy knocked shares down and the stock market steadily extended losses through the day. The Dow Jones Industrial Average (DJIA) lost 2%, the S&P 500 shed 2.1%, and the Nasdaq Composite declined 2.7%.
For the S&P 500 and the Nasdaq Composite Index, Wednesday’s tumble was the biggest drop in a single day since February 25, while the Dow’s decline was the sharpest in a day since January 29.
Richard Clarida, vice chair of the Federal Reserve, acknowledged on Wednesday that the latest inflation report was the second piece of data in a week to catch the central bank off-guard, describing it as the biggest miss in history.
Yet Clarida maintained the Federal Reserve’s dovish note, saying it will be some time before the US economy is sufficiently healed for the central bank to consider pulling back its crisis-level of support.
Some investors continued to challenge the Federal Reserve’s assessment, however.
We’ve been warning about the prospect of higher for longer inflation in the United States for many months, but even we hadn’t predicted this, said James Knightley, chief international economist at ING Group.
We increasingly doubt the Fed’s position that this is transitory and think they will end up hiking rates far sooner than 2024, he said.
Some money market investors seemed to agree. Eurodollar futures contracts expiring in December on Wednesday priced in a 25-basis-point rate hike by the end of next year, compared with 22 basis points before the inflation report.
Weakness on Wall Street reflected stock market losses in Asia, as surging commodity prices stoked inflation concerns. MSCI’s broadest index of Asia-Pacific shares outside Japan had tumbled 0.95% overnight, after reaching its lowest level since March 26.
European shares fared better. London’s blue-chip FTSE 100 bounced back 0.8% as buoyant corporate earnings and a better-than-expected economic growth report boosted hopes about a sharp recovery from the pandemic-driven recession.
In the US, the surprisingly strong inflation data lifted Treasury yields. The benchmark 10-year Treasury yield climbed to 1.6952%, its biggest rise in a day since March 18, and the two-year Treasury yield also increased to 0.1668%.
In keeping with expectations of increasing price pressures as the US economy recovers from the pandemic, the yield curve steepened, and the spread between 2- and 10-year Treasury yields widened to 152.8 basis points.
This article is for information purposes only.
Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.
There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.