US government bonds and Wall Street stocks sustained renewed selling on Wednesday after fresh data showed America’s inflation rate eased by a slimmer than expected margin last month.
The yield on the monetary policy-sensitive two-year Treasury note rose 0.07 percentage points to just under 2.7 per cent, according to Tradeweb data. Longer-dated Treasuries also came under pressure, with the 10-year yield recently up 0.03 percentage points to 3.02 per cent.
The blue-chip S&P 500 share index fell 0.5 per cent in early trading, while the tech-focused Nasdaq Composite dropped 1.2 per cent.
Consumer prices in the world’s largest economy rose at an annual rate of 8.3 per cent in April, down from a 40-year high of 8.5 per cent in March. The figure exceeded economists’ expectations for a cool-down to 8.1 per cent. Increases in the cost of new cars, food, airline fares and housing led were the biggest drivers of the increase, the labour department said in its report.
There was “a lot of hope in the market,” about getting into a cycle of [inflation] coming in lower than expected,” Guillaume Paillat, multi-asset portfolio manager at Aviva Investors, said ahead of the data release.
A downturn in global stock markets had eased ahead of the US inflation reading as traders sensed that price rises — driven by disruptions to supply chains from China’s coronavirus lockdowns and higher fuel and food costs from Russia’s invasion of Ukraine — were set to peak. The S&P is trading around 16 per cent lower so far this year.
Chinese official data released earlier on Tuesday showed that factory gate prices in the exporting nation climbed 8 per cent year on year last month, in a slight deceleration from an 8.3 per cent rise the month before.
Investors and analysts on Wednesday cautioned that even if inflation had now peaked, it could remain elevated for some time, pushing central banks to continue raising borrowing costs. The Federal Reserve, which raised its main interest rate by 0.5 percentage points last week and signalled more hikes to come, targets an average inflation rate of 2 per cent over time.
“It is not just about inflation peaking, but also the trajectory going forward,” said Aneeka Gupta, research director at exchange traded fund provider WisdomTree. “We believe it is going to be a long, drawn-out process back to levels where central banks are comfortable.”
US inflation “is still likely to overshoot the Fed’s target over the next couple of years and require further hikes beyond the aggressive repricing now expected by markets”, said Tim Drayson, US economist at Legal & General Investment Management.
Markets expect the Fed’s funds rate, at present set at between 0.75 per cent and 1 per cent, to reach 2.8 per cent by the end of this year.
Elsewhere in markets, Europe’s Stoxx 600 share index rose 0.5 per cent, after rallying ahead of the inflation data. Brent crude, the international oil marker, added 3.4 per cent to $105.45 a barrel.
