After a hotter than anticipated inflation reading, US stock futures fell

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Wall Street stock futures fell and Treasury bonds were sold off Wednesday following a warmer than expected US inflation reading that fuelled fears of an aggressive Federal Reserve rate hike.

Futures contracts tracking the broad-based S&P 500 index fell 1.5 per cent cent. Futures contracts on the technology-focused Nasdaq100 dropped 2.1 percent. The S&P has dropped almost 20 per cent so far this year as investors calculated the effect of higher borrowing costs on companies’ valuations.

Data on Wednesday showed that the annual rate of US consumer inflation was 9.1 percent last month. This is higher than consensus estimates of an 8.8 percentage increase. The month-on-30 increase in consumer price inflation was 1.3 percent, up from 1% in May.

The Fed was under pressure to increase its benchmark interest rate by 0.75 percentage points in June due to a surprisingly high May inflation print. This is the Fed’s highest since 1994.

The US central bank’s main policy rate sits in a target range of 1.5 per cent to 1.75 per cent at present. Futures markets have reflected higher expectations regarding the rate’s peak and are now pricing in an increase of nearly 3.6 percentage in February.

The latest hot inflation number “could open the door potentially to 100 basis points” in July, said Grace Peters, head of European equity strategy at JPMorgan’s private bank, “or a couple more 75 basis point hikes”.

“More hikes would tighten financial conditions more, placing a downside risk on economic growth.”

The benchmark 10-year US Treasury yield rose 0.09 percentage point to 3.05 percent as the prospect for sustained inflation decreased demand for this fixed-interest-paying asset. The prices and bond yields are inverted.

The Treasury yield, which tracks the interest rate expectations over two years, rose 0.14 percentage points from 3.18 to 3.18 percent. This reflects an “inverted yield curve” pattern that historically preceded recessions.

For the first time in over two decades, the euro fell below parity with its American counterpart. The dollar index, which compares six currencies, increased 0.3%, close to its two-decade peak.

Recent Manufacturing and consumer surveys are downbeatEconomists have warned of a US recession. However, fears are greater in Europe where governments are confronted with the possibility of Russia cutting its gas supplies.

The Stoxx Europe 600 share index — which has fallen 16 per cent so far this year in a broad global stock downturn driven by big central banks raising interest rates — built on losses from earlier in the session to trade 1.8 per cent lower after the inflation data. London’s FTSE 100 fell 1.4 per cent.

Brent crude, an oil benchmark, fell 1.1 percent to $98.4/barrel.

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