US stocks and bonds fall ahead of latest inflation data

U.S. stocks and government bonds fell on Thursday ahead of Friday’s consumer price data, which the Federal Reserve will inform at its policy-setting meeting next week.

The move also came after the European Central Bank left the door open for a very steep interest rate hike in September. The ECB’s hawkish stance and the possibility of high inflation in the US raised questions among investors about global growth, inspiring an exit from risky assets.

The blue-chip S&P 500 closed down 2.4%, while the technology-focused Nasdaq Composite fell 2.7%.

The consumer price index in the United States is expected to show an 8.3% pace of inflation in May, flat from the previous month and just off the four-decade highs reached earlier this year. The Bloomberg Survey of Economists, however, underestimated the pace of inflation year-on-year over the previous two months.

The 10-year US Treasury yield rose 0.02 percentage points to 3.04%. The policy-sensitive two-year yield rose 0.04 percentage points to 2.82%. The five- and 10-year break-even rates — measures of market expectations for inflation five and 10 years ahead — both rose.

The ECB said in a monetary policy statement that it would raise its main deposit rate by minus 0.5% by a quarter point in July and by another unspecified amount in September.

“If the medium-term outlook for inflation persists or deteriorates, a larger increase will be appropriate at the September meeting,” the ECB said.

The ECB is tightening monetary policy as part of a global shift towards higher borrowing costs to tackle inflation, which started to rise in 2021 as the coronavirus lockdowns ended and was exacerbated by the Russian invasion of Ukraine.

The central bank, which has also bought large amounts of eurozone government bonds in recent years to reduce funding costs, confirmed that it would end net purchases from July 1 and raised its inflation forecasts.

In Europe, the regional Stoxx 600 equity index extended early-day losses to close 1.4% lower. A FTSE index of Italian stocks fell 1.9% and Germany’s Xetra Dax lost 1.7%.

Yields on German, Italian, Spanish and Greek government bonds soared higher as investors worried about the economic fallout from the end of ultra-supportive monetary policies. The euro weakened against the dollar, losing 1% to $1.061.

“People are worried ahead of tomorrow’s CPI and what it might mean for the Fed. We’re in a wait-and-see mode,” said Lou Brien, market strategist at DRW Trading.

“Now the ECB seems ready to step in and now people may be thinking that if we get a strong CPI tomorrow the Fed will overtake the ECB.”

Brent, the oil benchmark, stabilized 0.4% at $123.07 a barrel, after rising nearly 60% so far this year.

Garland K. Long