NEW YORK, Feb 15 — Treasury prices plunged yesterday after a spike in US consumer prices in January raised expectations the Federal Reserve may quicken the pace of interest rate hikes, while global stocks rallied as investors took inflation in stride.
The US dollar fell against a basket of major world currencies after the Labor Department said its highly anticipated Consumer Price Index increased 0.5 per cent. Gold rebounded from losses as stocks swung higher.
The report increased the likelihood that the Fed will raise rates when policy-makers meet March 20-21 — even as US retail sales posted their largest decline in 11 months.
The odds of a March rate hike rose 7 percentage points to 83.1 per cent, according to the CME Group’s FedWatch tool.
Shares in Europe gained more than 1 per cent as did a gauge of global equity activity. Stocks on Wall Street opened lower but steadily climbed through the session after the initial shock of the big jump in monthly inflation was digested.
Joseph LaVorgna, chief economist for the Americas at French bank Natixis in New York, said inflation had to be put in context. The year-over-year rate on core inflation at 1.8 per cent was still below the Fed’s target of 2 per cent, he said.
Excluding the volatile food and energy components, the CPI shot up 0.3 per cent in January.
Monthly data tend to be noisy, said Phil Orlando, chief equity strategist at Federated Investors in New York.
“The market is doing exactly what the market does, it shoots first and asks questions later,” Orlando said, adding investors are likely to remain jittery until the first Fed policy-setting meeting in March under new Chair Jerome Powell.
“There ought to be some chop to it as we’re trying to figure out what’s going on in the economy and how might the Fed adjust monetary policy under a new leadership team given the backdrop of macroeconomic data,” Orlando said.
MSCI’s all-country world index of stocks in 47 countries gained 1.42 per cent while the pan-European FTSEurofirst 300 index of leading regional shares rose 1.03 per cent to close at 1,469.00.
Paul Eitelman, an investment strategist at Russell Investments, said it was unlikely the Fed would increase its forecasted rate hikes as such a move would be a bit bold for a new Fed chief and likely be an over-reaction to one data point.
Shares in Europe rose after initial declines as solid corporate results and economic data kept investors confident.
Data earlier in the day showed Germany’s economy was set to power ahead in 2018, while a Thomson Reuters study said fourth-quarter European earnings growth expectations were revised upwards after 15 weeks of downgrades.
The Dow Jones Industrial Average rose 253.38 points, or 1.03 per cent, to 24,893.83. The S&P 500 gained 35.75 points, or 1.34 per cent, to 2,698.69 and the Nasdaq Composite added 130.11 points, or 1.86 per cent, to 7,143.62.
German government bond yields hit their highest in more than two years. The yield on Germany’s 10-year government bond, the benchmark for the region, reversed earlier declines and rose around 3 basis points to 0.774 per cent — its highest level since September 2015, according to Tradeweb data.
Yields on the benchmark 10-year US Treasury note hit a fresh four-year high. The notes last fell 20/32 in price to yield 2.9131 per cent.
The dollar index fell 0.8 per cent, with the euro up 0.87 per cent at US$1.2457 (RM4.86). The Japanese yen strengthened 0.77 per cent versus the greenback to 107.01 per dollar.
Oil prices rebounded from earlier losses after US crude stocks rose less than expected and Saudi Energy Minister Khalid al-Falih said major producers would prefer tighter markets than to end supply cuts too early.
US crude inventories rose 1.8 million barrels last week, Energy Information Administration (EIA) data showed compared with expectations for an increase of 2.8 million barrels.
US crude rose US$1.41 to settle at US$60.60 per barrel and Brent settled up US$1.64 at US$64.36 per barrel.
US gold futures for April delivery settled up US$27.60 per ounce at US$1,358. — Reuters