Stocks tumbled in Asia and Europe, while futures fell for the fourth day on Wall Street after US inflation shot up to a 13-year high, shaking investors who are worried about the impact on their portfolios and a reduction of economic support from the Federal Reserve.
S&P 500 futures were down 0.36% after the index slid 2.15% on Wednesday. Nasdaq 100 futures had fallen 0.35% following a 2.62% drop for the index the previous day, and Dow Jones futures were 0.56% lower.
US consumer price index inflation surged 4.2% year on year in April from 2.6% in March, figures showed on Wednesday. It was the biggest jump since 2008, although depressed figures from a year ago exacerbated the rise.
Core CPI inflation – which strips out volatile energy and food prices – jumped 0.9% in April compared to a month earlier, the biggest monthly increase since 1982.
The surge in inflation rattled investors, who quickly sold off stocks and bonds. Prolonged higher inflation can eat away at the returns on assets, making them less attractive.
But it also piles pressure on the Fed, which has said it will look past “transitory” rises in inflation and keep up its unprecedented support to the economy until the jobs market brightens.
The key question for investors is whether the rise is indeed transitory, or whether the Fed may have to alter its position.
“Investors will be most watchful of how persistent this level of inflation is likely to be,” Jai Malhi, global market strategist at JPMorgan Asset Management, said.
Jim O’Sullivan, chief US market strategist at TD Securities, said in a note: “The strength can probably be viewed as ‘transitory’ to a large extent, due to post-COVID reopening as well as fallout from the semiconductor shortage.”
Fed Vice Chairman Richard Clarida said on Wednesday he still believed inflation would “return to – or perhaps run somewhat above – our 2% longer-run goal in 2022 and 2023.”
But many investors weren’t so sure, and the sell-off in stocks was evidence of market players hedging their bets, analysts said. Market expectations of inflation, as shown by a technical bond-market measure called the 5-year breakeven rate, rose to the highest in 15 years.
Tech stocks took a particularly heavy beating, as companies whose full earnings potential lies far in the future look less attractive when inflation and market interest rates are higher.
Bond yields rose as investors demanded better returns to account for higher inflation and priced in a stronger chance that central banks would raise interest rates sooner than currently expected.
The yield on the key 10-year Treasury note rose by more than 7 basis points on Wednesday and traded at 1.705% on Thursday, its highest in around a month. Yields move inversely to prices.
Markets are now bracing themselves for producer price index inflation data later on Thursday.
“For stocks, this might be an even tougher moment, given that companies may find themselves struggling to pass on price increases to customers, hitting profitability and putting the year-long earnings recovery in jeopardy,” Chris Beauchamp, chief market analyst at trading platform IG, said.
Jitters spread to the oil market, where prices dropped, as investors weighed up the ongoing COVID-19 crisis in countries such as India and recent disruption to a major US pipeline. Brent crude oil was down 2.55% to $67.55 a barrel, while WTI crude was off by 2.72% to $64.28 a barrel.
Elsewhere in markets, bitcoin tumbled 8.5% to $49,848 after Elon Musk said his electric car company Tesla would stop taking payment in the cryptocurrency.