Global stocks and bonds sold-off this week as investors reacted to a third straight month of US CPI inflation being stronger than expected. The global stock index is off -1.5% from last week’s all-time high. The bigger reaction was in bonds where the yield on 2-year US treasury notes rose from 4.73% to 4.93%, the dollar strengthened against other major currencies, the index is up +1% this week.
The inflation print for March showed CPI rising at an annualised rate of 3.5%, an uptick from 3.2% YoY in February - the rise was driven by the shelter and energy components. CPI plays an important factor in the Fed’s interest rate decisions as it tries to lower inflation toward its 2% target. Given the unwelcome rise and a strong jobs report last week the evidence is pointing to still strong demand in the US economy and the possibility rates need to stay higher for longer. Market participants are coming round to this view, interest rate futures show expectations currently of between one and two 25 bp cuts this year – down from six in January. Important however are other factors; also this week producer prices which measures the changes in prices received by US producers was lower than expected.
So far stocks have fallen less than bonds most likely because the hope is that inflation still allows companies to maintain their margins. The corporate earnings season gets going next week and we’ll get more insight into consumer spending patterns across various markets.
