As U.S. inflation prompts a 100 bps hike in wagers, stocks decline and the dollar rises.
London (Reuters) – After the latest red-hot U.S. inflation reading raised market apprehension about Federal Reserve rate hikes, European stocks fell in Thursday’s early trade, while the safe-haven currency rose.
According to data released on Wednesday, U.S. consumer prices rose 9.1 percent annually in June, up from 8.6 percent in May.
The data strengthened the case for the Federal Reserve to aggressively boost interest rates. Raphael Bostic, President of the Federal Reserve Bank of Atlanta, suggested at the July meeting that policymakers may consider a 100 basis point increase.
In early European trading, money markets had priced in a 54% chance of a one-percentage-point increase at the July meeting and a 46% chance of a 75-basis-point increase.
Asian stocks remained at their lowest levels in two years, and European markets opened in the negative. As of 07:35 GMT, Europe’s STOXX 600 and London’s FTSE 100 were both down 0.2% on the day as of 07:35 GMT.
Eddie Cheng, head of international multi-asset investment at Allspring Global Investments, opined that the Federal Reserve should likely restrict people’s expectations of what it can do.
“During the previous hike cycle, we noted that inflation continued to rise… Monetary policy requires time for monetary policy to have an effect on inflation.“
Riskier assets will be “collateral damage” in the Fed’s efforts to curb inflation, according to Cheng.
The dollar index, which measures its performance against a basket of currencies, rose 0.2% to 108.43, while the dollar gained 1.1% against the yen, reaching its highest level since 1998.
The British pound was down 0.2 percent at $1.1865.In the first vote to determine who will succeed Boris Johnson as leader of the Conservative party, former finance minister Rishi Sunak received the most support from Conservative lawmakers.
The euro fell 0.3% to $1.00325, having dropped below $1 for the first time since 2002 on Wednesday.
The euro has been under pressure because the European Central Bank has been slower than the Federal Reserve to end its decade-long ultra-easy monetary policy, as well as because of the economic risks associated with the euro zone’s dependence on Russian gas.
The yield on Germany’s benchmark 10-year government bond increased by 8 basis points to 1.231%.
Italian yields rose sharply ahead of a vote of confidence in the country’s parliament, which risks bringing down the government.
The 10-year US Treasury yield increased by about 7 basis points to 2.9817 percent.Deutsche Bank reports that the 2-year, 10-year portion of the Treasury yield curve are the most inverted they have ever been during this cycle (ETR:DBKGn).
An inversion of the yield curve, which occurs when short-term interest rates are higher than long-term rates, is commonly interpreted as a sign that markets are anticipating a recession.
Traders anticipated that a significant increase in U.S. interest rates would reduce crude oil demand, resulting in a decline in oil prices.
Overnight, the Monetary Authority of Singapore and the Bangko Sentral ng Pilipinas shocked the markets by tightening monetary policy outside of the normal cycle.
