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Global markets roiled by shock rise in US inflation; gold touches 5-month highs as investors seek havens

Amanda Cooper   

Global markets roiled by shock rise in US inflation; gold touches 5-month highs as investors seek havens
  • US stock futures edged up, indicating a stronger open later, after a surprisingly large rise in consumer inflation hammered indices.
  • US consumer inflation surged by the most since late 1990 last month, prompting investors to dump bonds and equities.

Global markets were roiled Thursday by a dramatic spike in US consumer inflation, which is running at its hottest pace in decade, throwing the interest rate outlook into doubt and boosting gold.

The US consumer price index - a key measure of nationwide inflation - gained 6.2% on a year-over-year basis, the fastest rate of annual inflation since 1990 and well above expectations for a 5.8% increase.

The data showed price pressures are increasing across a range of goods and services, rather than in specific areas, such as construction materials or used cars. That has raised doubt about the Federal Reserve's view that inflationary pressures will only be fleeting.

"We now expect core CPI inflation to peak at 6-to-6.5% in February or March next year, massively increasing the pressure on Chair Powell and other Fed doves," Ian Shepherdson, chief economist at Pantheon Economics, said.

"The risk that they cannot hold the "transitory" line is rising," he said about US policymakers.

The dollar rose to its highest against a basket of major currencies since last July, while gold hit its highest in five months, breaking above $1,870 an ounce thanks to a surge in inflation expectations.

US stock futures rose on Thursday, with those on the S&P 500 and Nasdaq 100 up 0.1 and 0.2%, respectively. That suggests there may be some respite for the benchmark indices later in the day, after the S&P 500 slid 0.8% on Wednesday for its biggest one-day drop in a month, while the tech-heavy Nasdaq 100 lost 1.4%. The MSCI All-World index dipped from record highs, losing 0.13%.

Two-year Treasury yields, which are the most sensitive to shifts in interest-rate expectations, rocketed higher by the most since last March following the CPI number on Wednesday, rising 9 basis points. The two-year yield, which moves inversely to the price, was last steady at 0.52%.

Meanwhile, five-year US breakeven inflation rates - a markets-based gauge of medium-term investor expectations for consumer price pressures - soared to a record 3.1%.

"There is a fear now that consumers, as well as markets may well have to absorb further price rises, with all the inherent risks that brings for company profit margins, and consumer inflation expectations," CMC Markets chief strategist Michael Hewson said.

Gold often trades inversely to the dollar, but with investors seeking shelter from stickier inflation than many had initially factored in, gold can be a beneficiary of those capital flows. Gold futures were last up 0.4% at around $1,856, while silver gained 0.8% to trade at $24.97 an ounce.

Highlighting the more cautious mood was a jump on Wednesday in the VIX volatility index - which many call "Wall Street's fear index" - to its highest level in a month.

Stocks in Asia mostly shrugged off the concerns around inflation, thanks in part to decline in local currencies against the dollar. With the yen down 0.2% against the dollar, the Nikkei rose 0.6%, while the Shanghai Composite closed up 1.2%, and the Hang Seng posted a 1% increase.

In Europe, data on Thursday showed the UK economy slowed in the three months to September. The Office for National Statistics said third-quarter gross domestic product expanded by just 1.3%, compared with expectations for 1.5% and after the second quarter's 5.5% expansion.

"UK growth is slowing following the easy gains made after economic reopening, and amid goods and labour shortages," Hussain Mehdi, macro and investment strategist at HSBC Asset Management, said.

"The near-term outlook remains tricky, with higher inflation set to weigh on household spending power, while the Bank of England could still raise rates before year-end due to concerns over a wage-price spiral taking hold."

The pound eased against the dollar and the euro, by around 0.1%, while UK blue chips got a boost from the weaker currency and a set of bumper retailer earnings this week, including M&S and Burberry.

The FTSE 100 was last up 0.3% on the day, making it one of the best performing indices in the region, versus a flat performance on the Stoxx 600 and a drop of 0.2% in the DAX.


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