U.S. equities declined on Thursday and Treasury yields surged after inflation for January was higher than forecast.
Over the year to January, core prices rose +6.0% from +5.5% previously, modestly higher than the +5.9% expected. Headline inflation rose +7.5%, also higher than the +7.3% expected and prior reading of +7%. Both measures rose +0.6% over the month, again slightly higher than estimates of +0.5% for each. The increase in prices was broad-based, with energy, food and rents remaining elevated as well as a rise in medical care. Economists at Bloomberg are forecasting inflation to peak at +7.8% in February, driven higher over the next month by rising energy prices before falling steadily as base effects reverse declining to +6.5% in Q2 and 4% by the end of the year.
The yield on 2-year Treasuries soared +19.6 basis points to 1.560%, while the 10 and 30-year rates rose +9.2 and +6.1 basis points respectively. Shorter dated breakeven inflation rates rose with the 1-year rate up +46.4 basis points to 4.238% and the 2-year rate rose +22.9 basis points to 3.448%. Futures pricing suggests traders are viewing a 50-basis point rate hike in March as becoming more likely, pricing in +1.84 rate hikes for the March 16th meeting and six rate increases by the end of 2022. Hawkish comments from St. Louis Fed President James Bullard always helped drive yields higher, saying he supports raising rates 1% by July, favouring spreading increases over three meetings while shrinking the Fed’s balance sheet over the second quarter, before deciding on a further path for rates depending on how data progressed.
As of 07:29 am AEDT the S&P500 was -1.51% lower with all sectors negative and 86% of stocks lower. Technology weighed on the index, accounting for nearly half the decline -2.53%, followed by health care -1.47% and consumer discretionary -1.69%. The Nasdaq Composite declined -1.87%, as did the Dow Jones -1.36% and Russell 2000 -1.16% with the VIX jumping +17.59% to 23.47.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
The ASX looks set to open weaker this morning with ASX200 futures down -38 points or -0.53% to 7,145. The index rose +0.28% on Thursday lifted by financials +0.90% and materials +0.52%, gains were concentrated among a number of heavyweight stocks with most sectors weakening and only 42% of stocks trading higher. Shares in NAB rose +4.51% after announcing second-quarter cash earnings of $1.8 billion, or an increase of +9.1%. Shares in AMP rose +5.94% despite a calendar 2021 loss of $525 million a -2.9% decline in revenue to $3.3 billion after it confirmed takeover approaches for its AMP Capital asset management business which it plans to spin-off to a separate ASX listing. The Australian dollar is little changed at 0.7176 this morning, meanwhile, the 10-year government bond yield was unchanged on Thursday at 2.105%.
Oil prices were mixed on Thursday with WTI trading +0.42% higher at US$90.05 while Brent edged -0.20% lower to US$91.41 a barrel. Prices in WTI initial rose as high as +2.32% following the higher U.S. inflation reading, with the commodity seen as providing some protection, before paring those gains. Iron ore futures in Singapore rose +5.03% on Thursday and are trading a further +1.67% higher this morning at US$155.50. Gold edged -0.20% lower to US$1,829 as did silver -0.13% to US$23.28 and Bitcoin -0.17% to US$44,421.
Economic data:
- RBA Lowe Speech 09:30
- German Inflation (MoM Jan) 18:00
- U.K. GDP (YoY Q4) 18:00
- U.S. University of Michigan Consumer Sentiment (MoM Feb) 02:00
This article was written by James Woods, Portfolio Manager, Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3632.
