US stocks and bonds slide on worse than expected inflation data

Wall Street stocks and shorter-dated Treasuries dropped sharply on Friday after US inflation data came in hotter than expected, raising market bets of how far the Federal Reserve will lift interest rates to curb surging prices.

The blue-chip S&P 500 fell 1.7 per cent in early dealings, after dropping 2.4 per cent in the previous session when the European Central Bank rattled markets by spelling out its own plans for tightening monetary policy.

The tech-heavy Nasdaq Composite, which is stacked with interest rate-sensitive growth stocks, dropped 2.1 per cent.

The US government’s consumer prices report showed the annual pace of inflation rose to 8.6 per cent in May, above April’s 8.3 per cent reading and exceeding economists’ forecasts as prices of food, energy and shelter all increased.

The Fed is widely expected to raise its main interest rate by a further 0.5 percentage points next week. Market predictions for the Fed’s funds rate rose after the inflation report, now pricing in a move up to 2.39 per cent by September.

“The market thinks the Fed is going to have to do more tightening and this increases the risk of recession,” said Brian Nick, chief investment strategist at Nuveen.

A FTSE index of developed and emerging market shares slipped more than 2 per cent lower, putting it on track for its worst weekly decline since January.

In bond markets, the two-year Treasury yield, which tracks interest rate expectations, jumped 0.13 percentage points to more than 2.9 per cent as the price of the instrument fell. The five-year yield added 0.11 percentage points to 3.18 per cent, while the 10-year benchmark yield added 0.06 percentage points to 3.1 per cent.

So-called breakeven rates — measures of market expectations of inflation in five and 10 years’ time — rose to the highest level since mid-May.

Europe’s regional Stoxx 600 share index dropped 2.4 per cent as worries about the US outlook added to fears about the effects of eurozone rate rises on financially weaker European nations.

“The message for the markets is that the priority now is quashing inflation, it’s not about growth,” said Paul O’Connor, head of the UK-based multi-asset team at Janus Henderson.

“The ECB’s hawkish pivot”, he added, provided “a big setback for global bulls, as it reinforces the idea that central banks just aren’t going to stop fighting inflation”.

The ECB, which has long been one of the world’s most accommodative central banks, signalled on Thursday that it may lift its main deposit rate to above zero in September, in its first departure from negative interest rates in eight years. It also said it would end net purchases of member states’ debt, sparking fears about financial stress for the bloc’s weaker economies.

The yield on Greece’s 10-year bond raced as much as 0.3 percentage points higher to 4.39 per cent — exceeding its level at the start of the coronavirus-driven market ructions in March 2020 — as the price of the debt fell significantly.

Italy’s 10-year bond yield rose above 3.7 per cent, more than triple its level at the start of the year.

The gap between Italian and German 10-year bond yields widened to 2.3 percentage points on Friday, its highest level since May 2020.

In Asia, Hong Kong’s Hang Seng index traded flat and Tokyo’s Nikkei 225 fell 1.5 per cent. Mainland China’s CSI 300 rose 1.5 per cent.