Investors sold stocks Thursday (May 13) after U.S. inflation beat Wall Street expectations and sent bond yields soaring, with European stocks mirroring Asian declines.
The euro fell 1.5 percent, while German and British indices both fell 1.9 percent, as investors worried the Federal Reserve might act earlier in tightening ultra-easy monetary policy.
The basic resources and oil and gas sectors have been the biggest gainers recently, driven by higher commodity prices, while falling more than 2 percent on Thursday.
“Inflationary pressures will rise and it won’t be temporary,” said Jeremy Gatto, an investment manager at investment firm Unigestion, as quoted in a Reuters report. “What does that mean? Interest rates will actually go up.”
The MSCI World Equity Index, which tracks stocks in nearly 50 countries/regions, fell 0.6 percent and was in the red for a fourth straight day.
Data showed U.S. consumer prices rose in April by the most in nearly 12 years as a surge in demand from an opening economy met supply constraints at home and abroad.
The rise triggered the worst one-day drop in the S&P 500 since February, largely due to sharp increases in airfares, used cars and lodging costs, all of which were driven by the pandemic and could prove temporary.
Federal Reserve officials were quick to downplay the impact of the one-month figure, with Vice Chairman Richard Clarida saying stimulus was still needed “for some time.
The 10-year U.S. Treasury yield stabilized at 1.68%, climbing 7 basis points overnight, the biggest one-day gain in two months.
Eurozone bond yields edged higher. German 10-year Treasury yields were flat after touching their highest level since May 2019 on Wednesday.
Nasdaq futures were flat, losing an earlier modest gain, while S&P 500 futures turned slightly negative.
As major economies reopen fully from the COVID-19 lock-up, many investors expect higher inflation throughout the year to spark turmoil in equity markets.
The Reuters report cites an analyst report from Deutsche Bank, saying, “It’s going to be a huge battle between the optimism of a massive reopening/stimulus on the one hand and the inflationary consequences on the other.”
As early as next December, investors see an 80 percent chance of a Fed rate hike.
MSCI’s broadest index of Asia-Pacific stocks outside Japan fell 1.3 percent, after Asian stocks retreated this week on a sell-off in Wall Street technology stocks.
Rising bond yields are a big positive for the dollar, which has recently come under pressure from a rapidly widening U.S. budget and trade deficit.
The dollar fell $90.661 against a basket of major currencies, off Wednesday’s 10-week low of 89.979.