European stocks fell and yields on US Treasuries rose on Friday as robust economic data and hawkish comments from central bank officials fanned fears that the Federal Reserve would keep interest rates high to combat inflation.
By late morning the Europe-wide Stoxx 600 was down 0.7 per cent, slightly higher than earlier in the session, while Germany’s Dax was 0.95 per cent lower. France’s Cac 40 had also lost 0.7 per cent, after reaching a record intraday high on Thursday.
Those declines followed falls overnight on Wall Street, where the blue-chip S&P 500 index had its worst day in a month. Investors were unnerved by producer price inflation data, which tracks wholesale prices, that rose at an annual rate of 6 per cent in January. This was down from 6.2 per cent in December but well above the consensus estimate of 5.4 per cent.
Futures tracking the blue-chip S&P 500 were down 0.7 per cent, while contracts for the tech-heavy Nasdaq 100 lost 0.9 per cent.
Stocks had risen earlier in the week after the release of stronger than expected retail sales, and as traders awaited further clues on the Fed’s next moves.
However, the release of the producer price index data has all but punctured any remaining optimism. Yields on 10-year US Treasuries rose 0.06 percentage points on Friday to 3.9 per cent, the highest since November. Yields on the two-year bond, which is more sensitive to interest rate changes, rose 0.08 percentage points to 4.7 per cent.
Yields on 10-year German Bunds rose 0.04 percentage points to 2.52 per cent, the highest level in a year.
Fund managers and economists have been watching closely for signs of persistent inflation, with recent data pushing up the level at which the market expects interest rates to peak and reducing the number of Fed rate cuts that are being priced in for later this year.
Meanwhile, more US central bank officials have come out in favour of staying the course on high interest rates, with Federal Reserve Bank of Cleveland president Loretta Mester saying on Thursday she had seen a “compelling case” for a half percentage point rise at the next meeting, and St Louis Fed president James Bullard also saying he wouldn’t rule out an increase of the same size.
The dollar index, which measures the greenback against a basket of six peer currencies, was up 0.6 per cent, while the euro slid 0.4 per cent.
“We’ve been calling for the dollar to strengthen on the back of US data. The producer price index was high and the growth story is looking better,” said Francesco Pesole, FX Strategist at ING. “We had a lot of hawkish commentary from the Fed in the last week, while its clearer in the ECB that there’s a spectrum of ideas, and we haven’t seen much European data.”
Brent crude prices fell 2.4 per cent to $83.11 per barrel, while the US WTI crude index dropped 2 per cent to $76.46.
Hong Kong’s Hang Seng index was down 1.3 per cent, while the Chinese CSI 300 fell 1.4 per cent.