LONDON, Oct 13 (Reuters) – MSCI’s global stock index lurched to a July 2020 low and dollar and bond market borrowing costs rose on Thursday as another red hot U.S. inflation reading cemented bets of another large Fed rate hike next month.
Traders flipped straight into selloff mode as the U.S Labor Department’s consumer prices index (CPI) report showed headline CPI gaining at an annual pace of 8.2% and core CPI, which eliminates volatile food and fuel prices, at a higher than forecast 6.6%. read more
It sent what had been higher Wall Street futures plunging by more than 2% as the market opened and left the S&P 500 (.SPX), European stocks (.STOXX) and MSCI’s main world index (.MIWD00000PUS) all facing a seventh straight day in the red.
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Global markets have suffered a torrid few weeks but the U.S. CPI data cut to the heart of worries that major economies will need to be pushed firmly into recession for inflation to be brought into line.
The seemingly-unstoppable dollar sparked into life pushing the euro , yen and Swiss franc back down /FRX although sterling was still up after a report that the British government was discussing scrapping more of its tax cuts laid out just last month.
Economists said the Fed is now expected to increase rates, which currently stand at 3.125%, by at least 75 bps next month and to continue raising them into next year. Markets show investors now expect U.S. rates to peak at around 4.85% in March, compared with a peak of 4.65% in May that was priced in right before the data.
“After today’s inflation report, there can’t be anyone left in the market who believes the Fed can raise rates by anything less than 75 bps at the November meeting,” Seema Shah, Chief Global Strategist at Principal Asset Management said.
“If this kind of upside surprise is repeated next month, we could be facing a fifth consecutive 0.75% hike in December with policy rates blowing through the Fed’s peak rate forecast before this year is over.”
In the bond markets, borrowing costs were rising again.
The U.S. 10-year benchmark yield jumped up past 4% again having been at 3.89%. Two-year rates hit 4.5% while German 10-year bond yields , rose to 2.304%, compared with 2.229% right before the U.S. data.
Earlier European data had confirmed German harmonised inflation was 10.9% y/y in September and almost 10% in Sweden too.
Minutes of the Fed’s latest policy meeting released on Wednesday had showed many officials “emphasized the cost of taking too little action to bring down inflation likely outweighed the cost of taking too much action”.
Several policymakers did stress, however, that it would be important to “calibrate” the pace of further rate hikes to reduce the risk of “significant adverse effects” on the economy.
Treasury yields were choppy in Europe. with most of the equivalent European yields down a touch too.
Markets lay 90% odds for another 75 basis-point Fed rate hike in November, versus 10% probability of a half-point bump.
CONCERNED
In Asia, widespread equity market weakness had seen Japan’s Nikkei (.N225) slip 0.6% and South Korea’s Kospi (.KS11) tumble 1.8% overnight as news that Taiwanese chipmaking giant TSMC (2330.TW) was seeing demand drop and was cutting its investment budget by at least 10% hit the wider region’s tech sector. read more
Hong Kong’s Hang Seng (.HSI) dropped 1.9% and mainland Chinese blue chips (.CSI300) lost 0.3% to leave MSCI’s index of Asia-Pacific shares (.MIAP00000PUS) close to 2 1/2-year lows.
“The risk of an over-tightening episode and some mishap in financial markets is higher than I can remember,” said Tom Nash, a fixed income portfolio manager at UBS Asset Management…