US equities softened on Tuesday after inflation slowed less than expected, raising investors’ expectations that the Federal Reserve will respond with further interest rate rises this year to combat increasing prices.
Wall Street’s blue-chip S&P 500 and the tech-heavy Nasdaq Composite slipped 0.4 per cent and 0.3 per cent, respectively in morning trade in New York.
Fund managers turned bearish after year-on-year US consumer price inflation fell to 6.4 per cent in January from 6.5 per cent the previous month, marginally higher than economists had expected. Annual core inflation, which strips out volatile food and energy prices, fell to 5.6 per cent from 5.7 per cent in December, also slightly above expectations, with prices rising 0.4 per cent month on month.
The strong number drew fresh concern that stubbornly high inflation would push the US central bank to raise rates higher than the market expected, as chair Jay Powell warned last week.
“The Fed ended the year thinking the economy is slowing, inflation is coming steadily down, the labour market is cooling . . . January data threw all of that up in the air,” said Neil Shearing, chief economist at Capital Economics. “The labour market is red hot, the economy looks like it’s in a better place and inflation is coming down more slowly. Put it all together and if you’re Jay Powell, you’re suddenly sleeping less easily.”
A measure of the dollar’s strength against a basket of six other currencies rallied following the inflation data but later gave up those gains to trade flat on the day. US government bonds sold off, with the yield on two-year Treasuries rising 0.08 percentage points to 4.62 per cent, having earlier dipped 0.03 percentage points. The yield on 10-year Treasuries rose 0.05 percentage points to 3.77 per cent. Bond yields move inversely to prices.
The Fed increased its benchmark interest rate by a quarter of a percentage point in February to its highest level since September 2007 but warned “ongoing increases” would be needed to bring inflation under control.
Pricing in the futures market shows investors now expect rates to peak just below 5.27 per cent in July — up from 5.18 per cent in the same month before Tuesday’s inflation numbers — with at most a single interest rate cut in the remainder of the year. Earlier this month, they had been expecting a peak of about 5 per cent in May, with two interest rate cuts by the end of 2023.
“People were positioned for a lower inflation print, everyone wanted a [Fed] pivot,” said Lyn Graham-Taylor, a senior rates strategist at Rabobank. “We’re now seeing a shift in the narrative.”
In Asia, Hong Kong’s Hang Seng index fell 0.2 per cent and China’s CSI 300 was steady. Europe’s region-wide Stoxx 600 closed 0.2 per cent higher. London’s FTSE added less than 0.1 per cent. UK government bonds sold off sharply after the publication of the US inflation numbers, with the yield on the interest rate-sensitive two-year gilt rising 0.17 percentage points to 3.81 per cent, its highest level since late October.
Prices for Brent crude, the international oil benchmark, fell 1.5 per cent to $85.32 a barrel.