Stocks slide and dollar strengthens as investors weigh interest rate outlook

Global stocks faltered and the dollar strengthened on Wednesday as investors weighed the outlook for interest rates following fresh inflation data in the US and UK.

Europe’s regional Stoxx 600 fell 0.1 percent and Germany’s Dax rose 0.4 percent as fund managers and economists digested the news that US consumer prices rose 6.4 percent year-on-year in January, a smaller decline than expected. Annual core inflation, which excludes volatile food and energy prices, was also slightly above expectations.

The disappointing US data reverberated through financial markets, raising the level at which investors expect US interest rates to peak and reducing the number of rate cuts forecast for later this year. Pricing in the futures market shows traders expect rates to peak at 5.27 percent in July, up from 5.18 percent before the data was released. A measure of the dollar’s strength against a basket of six peers gained 0.3 percent.

Futures on Wall Street’s benchmark S&P 500 and those that track the tech-heavy Nasdaq 100 weathered early losses and both traded 0.4 percent higher ahead of the US Open.

A “slowing down of inflation progress . . . means that we will reach the 2 percent target further into the future, which means that the [Federal Reserve] will stay higher for longer,” said Mike Zigmont, head of trading and research at Harvest Volatility Management. “There is no urgency for the Fed to cut rates if inflation is taking longer to get down where the Fed wants it to.”

Salman Ahmed, global head of macro at Fidelity International, said a combination of slowing inflation and the resilience of the “super-hot” US job market – which added more than half a million jobs in January, nearly triple the consensus forecast – meant that the Fed is “likely to step up its hawkish stance” in the coming months.

US Treasuries rallied on Wednesday as equities sold off, with the two-year yield falling 0.02 percentage point to 4.6 percent. The 10-year Treasury yield fell 0.01 percentage point to 3.74 percent as the bond’s price rose.

In the UK, data on Wednesday showed that UK inflation slowed to 10.1 percent in January, more than expected. Core inflation fell to 5.8 percent, much lower than the 6.2 percent forecast by economists. London’s FTSE 100 was flat and sterling fell 0.6 percent against the dollar to $1.209.

In Asia, Hong Kong’s Hang Seng Index fell 1.4 percent, China’s CSI 300 0.5 percent, Japan’s Topix 0.3 percent and South Korea’s Kospi 1.5 percent.

Brent crude oil prices, the international oil benchmark, fell 1.2 percent to $84.51 a barrel.