Global stock markets tumbled and the dollar strengthened on Friday after a bigger-than-expected spike in U.S. inflation in May sparked fears the Federal Reserve could tighten policy for too long and trigger a sharp slowdown.
The U.S. consumer price index rose 8.6% last month, the biggest year-over-year increase since December 1981, the Labor Department said. Economists polled by Reuters expected the CPI to rise 8.3% a year.
Many economists and market participants expected the data to show inflation had peaked, but gasoline prices hit an all time high, food costs soared and food prices rents have jumped.
“It was quite warm. This report suggests that underlying inflationary pressures remain quite strong,” said Aichi Amemiya, senior US economist at Nomura.
The dollar hit a nearly four-week high against a basket of currencies as US Treasury prices fell and short- and medium-term yields hit their highest levels in more than a decade. Two-year yields, very sensitive to rate hikes, climbed to 3.065%, the highest since June 2008.
Stocks on Wall Street and across Europe fell more than 2% as investors feared the central bank’s efforts to control inflation were so harsh that they would slow growth and squeeze corporate profits.
The pan-European STOXX 600 index fell 2.69% and the MSCI Global Stock Market Indicator lost 2.79%.
On Wall Street, the Dow Jones Industrial Average fell 2.73%, the S&P 500 lost 2.91% and the Nasdaq Composite fell 3.52%. All three indexes posted their biggest weekly declines since January, dropping about 5% each.
The S&P 500 is now down more than 18% from its record closing high on Jan. 3, a drop that brings it once again closer to confirming a bear market as defined by a 20% decline on the basis of the closing price.
Stronger-than-expected CPI data has changed the calculation of what the Fed is doing in September after “most certainly” raising rates by 50 basis points next week and in July, said strategist Art Hogan. Head of Markets at National Securities.
Analysts at Barclays and Jefferies now expect the Fed to deliver its first 75 basis point hike in 28 years next week.
Fed funds futures traders expect the Fed’s benchmark rate to rise to 3.69% next May from 0.83% currently.
The Fed still has a chance to engineer a soft landing as there is mounting evidence that a downturn is happening, said Rhys Williams, chief strategist at Spouting Rock Asset Management.
“At least in the goods economy, there are signs that demand is really slowing down,” Williams said. “Homes are on the market much longer, auto sales aren’t that hot, and shipping rates have crashed from Asia to here.”
Japan hints at yen intervention
Concerns have also grown over demand and growth in China, the world’s second-largest economy, after Shanghai and Beijing imposed new COVID-19 lockdown restrictions.
The yen hit a 20-year low after Japanese policymakers made rare comments on its weakness. Japan’s government and central bank expressed concern over the yen’s recent sharp declines in a rare joint statement, the strongest warning yet that Tokyo could step in to support the currency.
The yen hit 20-year lows against the dollar and seven-year lows against the euro on expectations that the BOJ will continue to lag other major central banks in exiting its stimulus policy.
The Japanese yen then weakened 0.05% to 134.41 to the dollar.
The dollar index rose 0.852%, with the euro falling 0.9% to $1.0519.
Overnight in Asia, MSCI’s broadest index of Asia-Pacific stocks outside Japan fell 0.9%.
Continued heavy buying by foreign investors and cautious hopes of easing regulations on tech companies drove Chinese stocks higher, despite lockdown warnings.
China’s blue-chip CSI300 index rose 1.5%, while Hong Kong stocks pared earlier losses to end 0.2%.
Oil prices fell on fears that rising prices will force consumers to cut demand, and as China imposed new COVID-19 lockdown measures.
U.S. crude futures fell 84 cents to settle at $120.67 a barrel, and Brent crude settled $1.06 at $122.01.
Gold prices rebounded strongly in volatile trade as attention turned to the economic risks of high inflation.
US gold futures rose 1.2% to $1,875.50 an ounce.
(Except for the title, this story has not been edited by NDTV staff and is published from a syndicated feed.)