U.S. stocks slumped on Wednesday and benchmark Treasury yields jumped after data showed consumer prices unexpectedly rose by the most in nearly 12 years in April, prompting bets on earlier interest rate hikes.
Moments after data showed the U.S. consumer price index jumped 0.8% last month, outpacing a 0.2% forecast, the dollar spiked, and by midday had further extended its gains as expectations of rising real interest rates lifted the currency.
The gyrations in financial markets underscored concerns among some investors that the Federal Reserve could be wrong in its prediction that inflation pressures in the United States are “transitory”, and that the central bank may have to raise rates sooner than it currently expects.
The prospect of tighter monetary policy knocked shares lower and major stock indices had slipped further in the red by noon. The Dow Jones Industrial Average shed 1.3%, the S&P 500 dropped 1.5%, its biggest fall in a single day in 2-1/2 months, and the Nasdaq Composite lost 2.3%.
Richard Clarida, vice chair of the Federal Reserve, acknowledged on Wednesday that the latest inflation report was the second piece of data in a week to catch the central bank off-guard, describing it as the “biggest miss in history”.
Yet, Clarida maintained the Federal Reserve’s dovish note, saying it will be “some time” before the U.S. economy is sufficiently healed for the central bank to consider pulling back its crisis-level of support.
Some investors believe that the Federal Reserve might be under-estimating the intensity of price pressures, however.
“We’ve been warning about the prospect of higher for longer inflation in the United States for many months, but even we hadn’t predicted this,” said James Knightley, chief international economist at ING Group, adding that there is evidence of “broadening price pressures”.
“We increasingly doubt the Fed’s position that this is transitory and think they will end up hiking rates far sooner than 2024.”
Weakness on Wall Street mirrored stock market losses in Asia, as surging commodity prices stoked inflation concerns. MSCI’s broadest index of Asia-Pacific shares outside Japan had slumped 0.95% overnight, after hitting its lowest level since March 26.
Wednesday’s unexpectedly strong inflation data lifted U.S. Treasury yields. The benchmark 10-year Treasury yield jumped to 1.6880%, and the two-year Treasury yield also rose to stand at 0.1668%.
In keeping with expectations of rising price pressures as the U.S. economy recovers from the COVID-19 pandemic, the yield curve steepened, and the spread between 10- and two-year Treasury yields widened to 152 basis points.
The dollar, which could benefit from rising real interest rates, gained after a wobbling briefly earlier in the session.
The dollar index, which measures the greenback against six major currencies, rose 0.6% to 90.762.
A stronger dollar weighed on the euro, and the common currency slid 0.6% to $1.2070.
Higher Treasury yields and a stronger dollar dragged on non-yielding bullion. Spot gold fell 0.8% to $1,822.35 an ounce.
Hopes of strengthening demand on the back of an economic recovery supported oil prices, which rose more than 1%, leaving them on track for their highest close in almost eight weeks.
U.S. crude jumped 1.1% to $66.01 a barrel. Brent crude also added 1.1% to $69.26 per barrel.
In cryptocurrencies, ether fell after scaling a new record high overnight, dropping 1% to $4,133.79. The value of the second-biggest digital token has surged over 5.5 times so far this year.