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US stocks turn weaker on unexpectedly strong inflation

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US inflation has surpassed expectations for a second month running, reigniting investor nervousness that the robust economy is stoking price pressures that could force the Federal Reserve to raise interest rates more aggressively.

The annual rate of headline inflation of 2.1 per cent for January was stronger than the consensus forecast of 1.9 per cent and in line with the rise seen in December.

The core gauge of consumer prices, which excludes energy and food, stayed steady at 1.8 per cent, defying forecasts to slip to 1.7 per cent. Both readings were higher than expected for a second month in a row.

In reaction, the US stock market fell on opening in New York, with the S&P 500, Dow Jones Industrial Average and the Nasdaq all declining 0.5 per cent in the first flash of trading.

The Iseq was 0.44 per cent weaker.

The yield on 10-year government debt rose 4 basis points after the inflation numbers were released to near a four-year high of 2.87 per cent. The dollar index jumped as much as 0.5 per cent after the numbers.

Month-on-month, a surge in gasoline prices helped drive headline prices higher by 0.5 per cent, a bigger jump than foreseen by any of the 74 economists polled by Bloomberg.

Indeed, airfares were the only weak component, according to Michael Pearce, senior US economist at Capital Economics. “Overall we think the increase in core CPI inflation in January is a sign of things to come over the rest of the year,” Mr Pearce said.

The US economic recovery has accelerated over the past year, lifted by a healthy global expansion and still-low interest rates around the world, and coupled with a recent tax cut package, expectations are mounting further.

Retail sales
Retail sales disappointed in January, muddying the picture of a healthy US economy somewhat, yet concerns that robust growth could quicken inflation have pushed US government bond yields higher and ultimately contributed to a week of mayhem on global stock markets last week.

Although markets have since then calmed down somewhat since then, the inflation figures for January had been anxiously awaited after signs of wage growth in the most recent US employment report rattled financial markets this month.

Investors are now widely expecting the US central bank to raise interest rates at least three times this year – with the next quarter-point potentially coming in March – and there is now nearly a 20 per cent chance of at least four increases in 2018, according to Bloomberg calculations from the prices of Fed Funds futures.

In early January, the Fed Funds market implied that investors thought there was roughly a 10 per cent chance of four interest rate increases this year.

“The Fed is now very likely to follow through on its plan to raise rates again in March,” said Luke Bartholomew, an investment strategist at Aberdeen Standard Investments. “If the sell-off gathers real momentum then they will need to think about their plans again but we’re a long way from there.”

European stock benchmarks also turned abound to lose some of gains made in the run-up to the data .The Europe-wide Stoxx 600 had been up 0.8 per cent earlier on Wednesday, but the US data crimped that gain to 0.2 per cent.

“With a steady repricing of global bond markets having contributed to a sharp plunge in global stock markets, there could be a whiff of a new era in the air,” noted Gene Frieda, a strategist at asset manager Pimco.

– Copyright The Financial Times Limited 2018

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