US government bonds in the short term came under pressure and stocks resumed their recent slide on Wednesday after unexpectedly hot “core” inflation figures boosted expectations of the Federal Reserve tightening its aggressive policy.
The yield on the two-year Treasury bill, particularly sensitive to monetary policy, rose by 0.03 percentage points to 2.64 percent, from below 0.2 percent a year ago. Yields rise as prices fall.
In contrast, the 10-year Treasury yield, driven by long-term economic trends, fell by 0.07 percentage points to 2.93%.
Consumer prices in the world’s largest economy have risen at an annual rate of 8.3 percent In April, down 8.5 percent in March, but still at an all-time high. The figure still exceeded economists’ expectations for cooling to 8.1%. The month-on-month change in core inflation, which does not include food and energy prices and is closely watched by economists, also far exceeded forecasts by 0.6%.
Rising costs of new cars, food, air fares and housing have been the biggest drivers of rising consumer prices, the Labor Department said.
“The report should be of concern to the Fed given the price increases in the core segment that appear to be spreading,” TD Securities said in a comment to clients.
As consumer prices soared, traders expected the Fed to raise interest rates aggressively for the remainder of the current year, putting US government debt short-term under special pressure.
“Today’s report will strengthen the Fed’s determination to aggressively tighten up its next meetings, and will formulate the expectations of [half percentage point] Rises in June and July, “said Sylvia D’Angelo, a senior economist at Federated Hermes.
Future markets show that investors expect the Fed’s primary interest rate, currently set at 0.75% to 1%, to reach 2.8% by the end of the current year. Investors strengthened their bets on the rate of interest rate rises after Wednesday’s inflation data, although interest rates expected for the end of the year remained slightly below a record high last week.
Wall Street stocks flipped after an early rise, as investors maintained their latest habit of treating any short rises as selling opportunities.
The S&P 500 was up 1.2% on Wednesday morning, but down 1.3% by mid-afternoon. The technology-focused Nasdaq Composite, which has lost about a quarter of its value so far this year, with higher interest rates squeezing growth companies’ valuations, fell 2.7 percent.
European stocks and U.S. stock futures rose ahead of the inflation report as investors assumed price rises would show more signs of a peak as higher energy costs, driven by Russia’s invasion of Ukraine, dampened consumer spending.
“There was a sense that people were cutting spending to fill their gas tanks and heat their homes,” said Brian Nick, chief investment strategist at Nubeen. “Obviously that was not the case last month.”
Investors and analysts warned on Wednesday that even if inflation had peaked, it could remain elevated for some time, pushing central banks to continue to raise borrowing costs. The Fed, which raised its key interest rate by 0.5 percentage points last week and signaled further raises to come, is aiming for an average inflation rate of 2 percent over time.
“This is not only related to the peak of inflation, but also in the forward trajectory,” said Anika Gupta, research director at WisdomTree, a stock exchange fund provider. “We believe it is going to be a long and drawn-out process back to levels that are convenient for central banks.”
Elsewhere in the market, the European stock index Stoxx 600 rose 1.7%. Brent Crude, the international oil marker, added 5.1% to $ 107.73 a barrel.
Short-term Treasuries hit after higher than expected inflation data Source link Short-term Treasuries hit after higher than expected inflation data