Investors now expect the US Federal Reserve to lift rates at its meeting in a month’s time (March 15-16) after consumer prices rose at an annual 7.5% rate in January – the fastest in 40 years.
As a result, the only question now for markets is whether it will be a rise of 0.25% next month or a more ‘radical’ 0.50% lift as the US central bank starts the monetary policy tightening cycle.
Many economists now speculate the Fed will reveal a crunching rise of half a per cent hike, a move that would certainly signal the central bank is serious about clamping down on inflation. (‘Hawkish’ is the jargon).
Economists at Citi changed their forecast to a 0.50% hike in March from the previous 0.25% prediction.
The headline Consumer Price Index (CPI) readout was higher than the 7.2% forecast from the market as was the 0.6% month-on-month rise from December. The core CPI – which strips out volatiles like energy and food was up 6% – a touch higher than the market forecast of 5.9%.
Both rates are their highest since 1982 in the last great inflation crisis in the US and the size of both readings and the proximity of the Fed meeting in March ensures that from now on markets will fixate on cost pressures and rate rises and nothing else.
The news battered stocks in volatile trading – a not unexpected development but it was the size of the headline inflation rise that did most of the damage – especially in techs.
The Nasdaq Composite slid 2.1% to 14,185.64, while the S&P 500 shed 1.8% to 4,504.08, and the Dow Jones Industrial Average lost 526.47 points, or 1.47%, to 35,241.59.
Stocks were volatile throughout the day, with all three major averages briefly turning positive at one point and the Dow being down more than 600 points at session lows.
Gold prices touched their highest level in two weeks, with the usual story of the metal’s appeal as an inflation hedge. But Comex gold futures settled mostly unchanged at $US1,837.40 an ounce as investors also realised that higher interest rates raise the cost of holding the metal.
Oil prices eased on the bigger than expected rate hike fears. Brent futures were down 0.43%, at $US91.16 a barrel and US West Texas Intermediate crude was down 0.16%, at $US89.52 a barrel but recovered a little to settle at $US89.97 a barrel in New York in early Asian trading.
Economists point out that federal funds rate futures have increased the chances of a 0.50% tightening by the Fed at next month’s meeting in the wake of the CPI report. – federal funds futures reckon there is now a 61% chance of a half a per cent rate rise – a couple of weeks ago there was no chance.
The yield on the benchmark 10-year US Treasury bond topped 2% for the first time since August 2019 and remained around 2.05% in late trading heading into Asian dealings on Friday. It ended January 11 days ago at 1.78%.
The yield on the US 2-year Treasury bond, the most sensitive duration to interest rates, surged 25 basis points to top 1.61%.
Germany’s benchmark 10-year yield soared to its highest since December 2018, a sign of the ‘spillover’ effect from the US CPI and interest rate picture.
Reuters pointed out that even in in low inflation Japan, rising costs are impacting central bank thinking.
The Bank of Japan announced that it would buy an unlimited amount of 10-year government bonds at 0.25% after the 10-year government bond yield hit 0.23% on Thursday, the highest since 2016 before easing back.
Sweden’s central bank kept its policy broadly unchanged, saying it was too early to withdraw support for the economy and that surging inflation was temporary, which is a policy stance not unfamiliar in Australia.
the Australian 10 year bond yield closed at 2.10%, steady for the session.
The Reserve Bank of NZ meets on February 23 and is widely expected to lift its key rate for a third time in.
