U.S. stocks sank and Treasury yields spike higher after the hottest inflation reading in four decades prompted a Federal Reserve official to call for accelerating rate hikes.
The two-year bond rate surged as much as 26 basis points in one of the fastest moves in a decade after data showed consumer prices surged more than 7 per cent last month. St. Louis Fed Chair James Bullard said the central bank should raise rates by 100 basis points over the next three meetings. That sent risk assets tumbling, with the S&P 500 sliding 1.8 per cent and the tech-heavy Nasdaq 100 dropping 2.3 per cent.
Bullard’s plan involves spreading the increases over three meetings, shrinking the Fed’s balance sheet starting in the second quarter and then deciding on the path of rates in the second half based on updated data. He said he was undecided on whether the March meeting should begin with 50 basis points and raised the possibility of the Fed at some point considering a move between scheduled meetings.
The St. Louis Fed chief’s comments followed data showing inflation accelerated to a four-decade high in January, with the consumer-price index reaching 7.5 per cent, more than the median estimate of 7.3 per cent in a Bloomberg survey. Markets boosted bets on rate hikes, pricing a full percentage-point increase over three meetings, which would require the first 50 basis-point increase since 2000 unless a move was made between Fed meetings.
“There is a difference between what any one FOMC participant says and what the committee does,” said Chris Low, chief economist at FHN Financial. “But the odds of a 50bp hike in March or May are higher if the market expects it. Bullard is well aware of this and likely intended to push the fed funds futures market to reprice in support of the urgency he feels after this morning’s CPI report. If he can make us think it, the Fed is much more likely to do it.”
Overnight index swaps priced about 80 per cent odds of a 50 basis-point liftoff in March, with an additional 25 basis points priced for May and June. Just under six-and-a-half quarter-point moves were priced into the December Fed meeting.
The Fed slashed the upper band of its target funds rate to 0.25 per cent at the onset of the pandemic in 2020, matching the lowest level on record, and has kept it there since to foster an economic recovery. The sea of liquidity helped boost stocks, propelling the S&P 500 to successive records through 2021 and into the first days of January. But fears of monetary tightening has sent stocks lower this year, leaving the S&P 500 down about 5 per cent year to date.
Here’s what others said about the inflation data Thursday:
- “Right now, investors are not only worried about what the Fed does on interest rates, but then what impact that will have on growth.” Inflation’s hot, but “investors will move toward looking at cash flows and what companies are going to be doing, and I think that’s supportive of the markets.” -- Chris Gaffney, president of world markets at TIAA Bank
- “All else equal, more fuel to the inflation fire should harden the Fed’s resolve to begin raising interest rates at its next meeting in March and introduce quantitative tightening in the months thereafter.” -- Jason Pride, chief investment officer of private wealth at Glenmede
- “High energy prices and supply issues are stoking inflation but these issues should eventually fade. Of greater concern is that wage pressures are building and the central bank will not want to risk a wage price spiral. Looking ahead though, real consumer spending on discretionary goods and services is likely to cool naturally, as higher energy costs begin to bite.” -- Jai Malhi, global market strategist at JPMorgan Asset Management
- “Overall, we remain constructive on equities over bonds with a preference for cyclical and value stocks, commodities and commodity-linked equities. One theme that ticks all those boxes is dividend-paying European and U.K. equities which have lagged their U.S. peers and offer the potential for catch-up gains on a total return basis.” -- John Leiper, chief investment officer at Titan Asset Management
Here are the main market moves:
Stocks
- The S&P 500 fell 1.8 per cent as of 4 p.m. New York time
- The Nasdaq 100 fell 2.3 per centThe Dow Jones Industrial Average fell 1.5 per cent
- The MSCI World index fell 1.1 per cent
Currencies
- The Bloomberg Dollar Spot Index rose 0.2 per cent
- The euro was little changed at US$1.1431
- The British pound rose 0.1 per cent to US$1.3554
- The Japanese yen fell 0.5 per cent to 116.05 per dollar
Bonds
- The yield on 10-year Treasuries advanced 11 basis points to 2.05 per cent
- Germany’s 10-year yield advanced seven basis points to 0.28 per cent
- Britain’s 10-year yield advanced nine basis points to 1.52 per cent
Commodities
- West Texas Intermediate crude rose 0.5 per cent to US$90.12 a barrel
- Gold futures fell 0.5 per cent to US$1,827.70 an ounce
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