Treasuries rallied and U.S. stocks declined after a less-than-forecast increase in inflation was seen as giving Federal Reserve officials more flexibility when it comes to pulling back on stimulus. The dollar fluctuated.

Yields on benchmark 10-year notes fell 5 basis points to 1.26 per cent, narrowing the yield gap between short- and longer-maturity U.S. debt. The financial, industrial and energy sectors led the S&P 500 lower even after the Labor Department reported that the consumer price index increased 0.3 per cent from July. Economists called for a 0.4 per cent gain. The Dow Jones Industrial Average was weighed down by Goldman Sachs Group Inc. and Caterpillar Inc.

“It appears that the continued rally in Treasuries is due to speculation that some people have that the CPI data pushes off the Fed” tapering, said Blake Gwinn, strategist at RBC Capital Markets. Gwinn said he doesn’t agree with that view, and continues to see the Fed’s announced the start of its reduction in asset purchases in November or December.

The CPI figures offer some validation of views among Fed officials and the Biden administration that high inflation will prove temporary. The report could also help blunt criticism from Republicans that President Joe Biden’s economic stimulus is spurring damaging inflation as he seeks to sell a US$3.5 trillion long-term tax-and-spending package that’s also running into opposition from moderate Democrats.   

The focus was firmly on price pressures, with a gauge of commodities around a decade-high. The global stock-market rally is facing headwinds amid concerns about the delta virus strain and risks from elevated inflation, which is being stoked by COVID-19 related supply disruptions. 

“Today’s selloff in equities is simply a continuation of the weakness we saw last week,” said Adam Phillips, managing director of portfolio strategy at EP Wealth Advisors. “Although the August CPI report all but guarantees no taper announcement at next week’s FOMC meeting, the clear and present danger is around a slowing economy.”

Elsewhere, Japan’s Nikkei 225 Stock Average closed at the highest level since 1990. Hong Kong and China wavered as traders evaluated the troubles of indebted developer China Evergrande Group, Beijing’s regulatory curbs and a virus flareup. 

Some of the main moves in markets: 

STOCKS

• The S&P 500 fell 0.6 per cent as of 4:02 p.m. New York time
• The Nasdaq 100 fell 0.3 per cent
• The Dow Jones Industrial Average fell 0.8 per cent
• The MSCI World index fell 0.4 per cent

CURRENCIES

• The Bloomberg Dollar Spot Index was little changed
• The euro was little changed at US$1.1804
• The British pound fell 0.2 per cent to US$1.3806
• The Japanese yen rose 0.3 per cent to 109.67 per dollar

BONDS

• The yield on 10-year Treasuries declined five basis points to 1.27 per cent
• Germany’s 10-year yield declined one basis point to -0.34 per cent
• Britain’s 10-year yield was little changed at 0.74 per cent

COMMODITIES

• West Texas Intermediate crude was little changed
• Gold futures rose 0.7 per cent to US$1,807.20 an ounce