European stock markets fell on Friday, following a decline on Wall Street overnight, after data showed US inflation had risen to a 40-year high.
The regional Stoxx 600 equity gauge fell 0.7 per cent in early dealings, while the UK’s FTSE 100 lost 0.6 per cent.
US consumer prices climbed 7.5 per cent in the year to January, the latest inflation report on Thursday showed, prompting speculation of the Federal Reserve rapidly raising borrowing costs after pinning its main funds rate close to zero since March 2020.
The report sent the yield on the benchmark 10-year Treasury note — which moves inversely to the price of the government debt security and underpins mortgage rates and global corporate borrowing costs — above 2 per cent for the first time since 2019.
Money markets rushed to price in extra rate rises and by Friday morning were anticipating a move in the funds rate up to almost 1.8 per cent by December. The dollar index, which measures the US currency against six others, rose 0.4 per cent.
Wall Street stocks fell heavily on Thursday, with the technology-heavy Nasdaq Composite closing 2.1 per cent lower as prospects of tighter monetary policy pressured the valuations of more speculative businesses.
The data raised “a firestorm of Fed speculation,” Standard Chartered strategist Steve Englander wrote in a note to clients.
It had “even raised the small possibility of the first intermeeting Fed rate hike since 1994, and before that since 1979”, Deutsche Bank strategist Jim Reid added, referring to central banks’ usual policies of making monetary policy decisions at their scheduled meetings.
“The market now prices some risk of an emergency hike before March.”
James Bullard, president of the St Louis Fed and a voting member of the Federal Open Market Committee, told Bloomberg on Thursday that he would like to see 100 basis points (1 percentage point) worth of interest rate increases by July 1.
The 10-year Treasury yield declined 0.02 percentage points to 2.01 per cent on Friday, while Germany’s equivalent Bund yield slipped 0.03 percentage points to 0.27 per cent, around its highest since late 2018.
Inflation has soared in the US and Europe in recent months as energy costs rebounded from pandemic-era lows and supply chains remained disrupted by a resurgent demand for goods.
The pressure this has piled on central banks to act has curbed investors’ appetite for fast growing but highly valued tech shares, with the Nasdaq now down more than 9 per cent this year.
European stock markets, with higher weightings of bank stocks that benefit from interest rate rises, and energy and resources groups that are boosted by higher commodity prices, have done better. London’s FTSE 100 is 3.4 per cent ahead this year while the Stoxx 600 is 3.8 per cent lower. On Friday morning, European energy, mining and telecoms groups traded steadily.
In Asia on Friday, mainland China’s CSI 300 share index fell 0.8 per cent. Tokyo’s Nikkei 225 closed 0.4 per cent higher as exporters were boosted by a stronger US dollar.