US equities fell on Tuesday after inflation slowed less than expected, raising investors’ expectations that the Federal Reserve will respond with further interest rate rises this year.
Wall Street’s blue-chip S&P 500 and the tech-heavy Nasdaq Composite both slipped 0.5 per cent after swinging between small gains and losses in the first hours of trading. Europe’s region-wide Stoxx 600 rose as much as 0.6 per cent before handing back its gains. London’s FTSE was up 0.2 per cent.
The moves came after year-on-year US consumer price inflation fell to 6.4 per cent in January from 6.5 per cent the previous month, marginally higher than economists had expected. Annual core inflation, which strips out volatile food and energy prices, fell to 5.6 per cent from 5.7 per cent in December, also slightly above expectations, with prices rising 0.4 per cent month on month.
The strong number drew fresh concern that the US central bank would be forced to raise rates higher than the market expected, as chair Jay Powell warned last week.
“The Fed ended the year thinking the economy is slowing, inflation is coming steadily down, the labour market is cooling . . . January data threw all of that up in the air,” said Neil Shearing, chief economist at Capital Economics. “The labour market is red hot, the economy looks like it’s in a better place and inflation is coming down more slowly. Put it all together and if you’re Jay Powell, you’re suddenly sleeping less easily.”
A measure of the dollar’s strength against a basket of six other currencies rallied following the inflation data to trade up 0.1 per cent. US government bonds sold off, with the yield on two-year Treasuries rising 0.07 percentage points to 4.6 per cent, having earlier dipped 0.03 percentage points. The yield on 10-year Treasuries rose 0.04 percentage points to 3.75 per cent. Bond yields move inversely to prices.
The Fed increased its benchmark interest rate by a quarter of a percentage point in February to its highest level since September 2007 but warned “ongoing increases” would be needed to bring inflation under control.
Though investors initially took comfort from Powell’s assertion that disinflation is under way, a report indicating the US labour market surged by 500,000 jobs in January has since undercut a stock market rally largely premised on the central bank pausing its rate rises later in the spring.
Pricing in the futures market shows investors now expect rates to peak just below 5.25 per cent in July — up from 5.18 per cent in the same month before Tuesday’s inflation numbers — with at most a single interest rate cut in the remainder of the year. Earlier this month, they had been expecting a peak of about 5 per cent in May, with two interest rate cuts by the end of 2023.
In Asia, Hong Kong’s Hang Seng index fell 0.2 per cent and China’s CSI 300 was steady.
Prices for Brent crude, the international oil benchmark, fell 1.2 per cent to $85.37 a barrel.
