Inflation Worries Ruffle Stocks, Underpin Dollar

The U.S. consumer price index jumped 0.9% in June, data showed on Tuesday, above market expectations and the largest gain since June 2008.

Investors are watching the semi-annual testimony of Fed Chair Jerome Powell to Congress on Wednesday and Thursday for clues on whether the Fed will take more aggressive steps to halt rising inflation.

“This isn’t surprising that the market is concerned about inflation. Our view is still that most of it is transitory,” said Seema Shah, chief strategist at Principal Global Investors. She said she did not expect the Fed to start tapering its bond-buying programme until early next year.

“The Fed speakers will be out in force today reiterating their patience with inflation to reassure markets.”

S&P futures were little changed after the S&P 500 index lost 0.35% on Tuesday following the inflation data. The Dow Jones Industrial Average fell 0.31% and the Nasdaq Composite dropped 0.38% overnight.

MSCI’s broadest gauge of global stocks dipped 0.14% after hitting a record high on Tuesday on investor bets of a global economic recovery just weak enough to permit central banks to retain a dovish policy.

European stocks fell 0.31% after reaching record peaks on Tuesday, with Germany down 0.15% and France off 0.26%.

Britain’s FTSE 100 dropped 0.54%, after UK inflation touched 2.5% in June, its highest in nearly three years.

MSCI’s broadest index of Asia-Pacific shares outside Japan dropped 0.25% as Chinese blue-chips fell 1.15%. Japan’s Nikkei dipped 0.38%.

KIWI FLIGHT

The New Zealand dollar shot up 0.92% as markets bet that a New Zealand rate hike is imminent after the central bank on Wednesday unexpectedly announced it would end its bond purchase programme from next week.

Barclays analysts forecast a 25 basis point rate hike at the central bank’s November meeting.

The Bank of Canada is also expected to taper weekly asset purchases at its meeting later on Wednesday, according to a Reuters poll.

The Canadian dollar dipped 0.12% to 1.2494 per U.S. dollar.

The euro rose 0.19% to $1.1796 after the U.S. dollar earlier touched a three-month high against the single currency.

The dollar index, which tracks the greenback against a basket of currencies of other major trading partners, weakened 0.2% to 92.615 after rising as high as 92.832 - just below the 92.844 level reached last week for the first time since April 5.

The dollar dipped 0.11% against the yen to 110.50.

The pound rose 0.43% against the dollar after the high UK inflation data.

“An interest rate rise is not yet around the corner, but it is steadily becoming a less distant prospect, and this is injecting momentum into the pound,” said Ulas Akincilar, head of trading at INFINOX.

Bank of England Deputy Governor Jon Cunliffe said a jump in British inflation was a bump on the road as the economy reopened from lockdowns, and that the BoE would look at its likely persistence in new forecasts next month.

U.S. bond yields pulled back after jumping across the curve on Tuesday on the U.S. inflation data.

The benchmark 10-year yield slipped to 1.3946% from a close of 1.415% on Tuesday.

President Joe Biden’s administration is continuing to push for fiscal stimulus to boost the U.S. economy.

Democrats on the U.S. Senate Budget Committee late on Tuesday reached an agreement on a $3.5 trillion infrastructure investment plan that they aim to include in a budget resolution to be debated this summer.

German 10-year Bund yields were little changed at -0.293% after Germany sold 3.392 billion euros in a top-up of its 0.00% 10-year Bund.

Oil fell after data showed China’s first-half crude imports dropped 3% from January to June versus a year earlier. [O/R]

U.S. crude was down 0.57% at $74.80 a barrel and global benchmark Brent crude was down 0.45% at $76.05 per barrel.

Spot gold, a traditional inflation hedge, rose 0.42% to $1,815 per ounce. [GOL/]