A selloff in global equity markets paused yesterday as oil prices retreated from a four-month high, but accelerating US consumer inflation boosted expectations for a rate hike from the Federal Reserve next week, keeping bond yields elevated.
The Consumer Price Index increased 0.4 per cent last month after edging up 0.1pc in July, the Labour Department’s Bureau of Labour Statistics said.
“Today’s inflation data have done nothing to change our view that the Fed is behind the curve,” said David Rees, head of global economics at Schroders.
“While headline inflation is being pushed around by rising energy prices, the bigger picture is that the economy is running hot and domestically generated inflation is grinding higher.”
Traders were quick to add to bets for a rate hike from the Fed at its two-day meeting next week. Markets now see about an 85pc chance of a quarter-point hike, compared with around 67pc prior to the data.
Brent crude hit a four-month high of $109.97 a barrel yesterday after a 6pc jump the day before, but it soon ran into selling pressure and was last down about 3.3pc at $104.04. It was still set for a weekly rise of over 8pc.
Oil flows remained restricted through the Strait of Hormuz as the US and Iran traded attacks, although prices have fallen after the Financial Times reported that foreign ministers in the Middle East were trying to work out a temporary deal to manage shipping through the waterway.
But markets are still pricing in the risk of a protracted war. Comments from President Donald Trump that the conflict could last beyond the November midterm elections haven’t helped, with bond yields surging globally on heightened inflation fears.
“Markets are pricing in a scenario of higher rates for longer,” said Gustav Helgesson, macro strategist at SEB.
The benchmark 10-year Treasury yield was slightly lower yesterday at 4.94pc, helped by retreating oil prices. It briefly touched its highest in almost three years at 4.9915pc immediately after the inflation data.
The 30-year yield scaled another 19-year top of 5.424pc before falling back to 5.318pc. Bond yields move inversely with prices.
In Europe, the 10-year German Bund yield was up 1 bp for the day and up 17 bps for the week, its biggest weekly rise since March.
Analysts at JPMorgan now expect eight of the nine developed-market central banks to hike interest rates by the year end, including the Fed, BOJ, all four main central banks in Europe, and the reserve banks of Australia and New Zealand.
“The tightening is for now expected to remain shallow, but risks to our forecasts lean in the direction of more action in the face of resilient growth, sticky core inflation, and commodity price pressures,” they said in a note.
The European Central Bank raised interest rates on Thursday for the second time this year and some officials see more tightening ahead with October in play.
Wall Street opened the day higher, as investors took comfort from a dip in oil and gas prices, although major bourses were still set for sharp weekly falls.
The Dow Jones Industrial Average was up 0.96pc in early trading, while the S&P 500 climbed 0.94pc and the Nasdaq Composite jumped 1.02pc.
The pan-European STOXX 600 was up 0.7pc yesterday but down 1.5pc this week. MSCI’s gauge of stocks across the globe was last up 0.5pc.
The US dollar rose with higher Treasury yields, having gained 0.4pc on Thursday against its major peers. It was steady yesterday at 99.11.
Gold rose 1.8pc to $4,392 an ounce after dropping nearly 2pc on Thursday.
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