Eurozone debt markets under pressure after dismal UK inflation data

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Eurozone debt markets came under pressure on Wednesday after worse-than-expected UK inflation data triggered a sharp sell-off in the country’s government bonds.

Consumer Price Index figures for the UK showed a 10.1% year-on-year rise for July, higher than June’s figure of 9.4% and better than consensus forecasts from economists in an increase of 9.8%.

The figures sparked a rout in short-term UK debt, which is sensitive to changes in interest rate expectations, with the two-year yield jumping 0.24 percentage points to 2.39%. Ten-year gilt yields rose 0.12 percentage points to 2.24%. Bond yields rise when their prices fall.

That selloff ricocheted through eurozone bond markets, with the German two-year yield rising 0.12 percentage points to just under 0.7% and the equivalent Italian yield adding 0.14 percentage points to 1 .56%. US debt came under lower pressure, with the two-year yield rising 0.04 percentage points to 3.3%.

Movements in gilts were likely to pressure the Bank of England to raise interest rates more aggressively, raising concerns about the UK’s growth outlook, investors said. “Today’s release of higher-than-expected inflation, combined with the prospect of higher inflation to come in the autumn, heightens the policy challenge for the Bank of England,” said David Dowsett , Global Head of Investments at GAM Investments.

As growth concerns intensified, stock markets also retreated. The FTSE 100, which is weighted towards international energy and commodities companies and is up 1.7% this year, lost 0.4%.

“The magnitude of the income squeeze facing [UK] households will be hard to ignore and measures to protect the most vulnerable are likely,” said Hussain Mehdi, macro and investment strategist at HSBC Asset Management. “However, overall real purchasing power will remain very limited and amid a still hawkish Bank of England, this year’s recession is a baseline outcome.”

The European regional Stoxx 600 stock index fell 0.3% and the German Dax index lost 0.9%. In Asia, Japan’s Topix index closed up 1.3%, while Hong Kong’s Hang Seng rose 0.5%.

The grim UK inflation figures came just a week after US data signaled the rate of consumer price growth may be stabilizing in the world’s biggest economy.

Wall Street’s broad S&P 500 edged higher on Tuesday, closing 0.2% higher, while the tech-heavy Nasdaq Composite fell 0.2%, after earnings results from retailers such as Walmart and Home Depot indicated consumer strength. Futures following the S&P and Nasdaq 100 fell 0.6% and 0.7% respectively on Wednesday.

Later in the session, investors will carefully scrutinize the minutes of the Federal Reserve’s latest monetary policy meeting for additional clues about the central bank’s strategy to fight inflation.

Brent crude gained 0.7% on Wednesday to $92.98 a barrel, but remained more than 5% lower for the week as recession fears continue to weigh on demand expectations.

The pound was broadly stable against the dollar and the euro, gaining 0.1% on the greenback to trade at $1.21.

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