Highest inflation in 40 years shocks the markets

By: Miguel A. Rodriguez

14:42, 11 February 2022

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Stocks tumbled on Thursday after the US consumer price data came in higher than expected, and Fed member James Bullard hinted at raising interest rates to counter this issue.

Data from the US Department of Labor showed consumer prices rose 7.5% last month year over year, beating economists' estimates of 7.3% and marking the biggest annual rise in inflation in 40 years.

St. Louis Fed President Jim Bullard - a voting member of the US central bank monetary policy committee – commented that recently released data convinced him to fully support rate hikes by a full percentage point by July.

Shortly after his comments, the Fed funds futures contracts were 100%, reflecting an increase in the bank’s target range for its benchmark rate to 1% - 1.25% by the end of June’s meeting. Furthermore, some forecasts were already pointing to even higher increases.

Treasuries were aggressively sold, with the 10-year Tnote reaching a yield of 2.04%, although the sharpest move came at the short end of the curve. And it did not only happen in American bonds but also in European ones, dragged down by the fall in treasuries, with the yield of the German bund jumping above 0.30%.

The sudden shifts in the EU bond market caused a rebound in the price of the EUR/USD pair. It fell to the resistance zone around 1.1485, a movement that in principle would be somewhat counterintuitive, as inflation data leads to raising expectations of rate hikes in the United States and not in Europe. In fact, the pair returned to lower levels due to rising pressure on the dollar, which was strengthening against almost most of its peers. The North American indices continued to fall, with tech-heavy Nasdaq dropping 2.21%.

From now on, after this worrying inflation data, the market could bet on more aggressive increases in interest rates this year, potentially putting the reference rate above 1.50%. If this happens, the US Dollar could continue its upward trend.

Sources: Bloomberg, Reuters.

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