Global markets roiled by shock rise in US inflation; gold touches 5-month highs as investors seek havens

REUTERS/Marcelo Del Pozo
US stock futures rose after an unexpectedly large increase in consumer inflation that hampered indices.

The US consumer inflation rate soared to its highest level since late 1990, prompting investors and bond-holders to sell bonds and equities.

In spite of the strong dollar, gold was at its highest level in five months. This was because investors were looking for inflation hedges.

The dramatic rise in US consumer inflation on Thursday caused turmoil in global markets. It is now running at its highest pace in ten years, putting the outlook for interest rates in doubt and driving up gold prices.

The US consumer price index, a key indicator of national inflation, increased 6.2% year-over-year. This is the fastest annual inflation rate since 1990 and far more than what was expected to happen at 5.8%.

Data showed that price pressures are rising across a wide range of goods and services rather than just in certain areas like construction materials or used cars. This has cast doubt on the Federal Reserve's belief that inflationary pressures are temporary.

"We now anticipate core CPI inflation peaking at 6-to-6.5% by February or March next Year, massively increasing pressure on Chair Powell, Fed doves," Ian Shepherdson (chief economist at Pantheon Economics) stated.

He said that the risk of them not holding the "transitory line" is increasing.

The dollar rose to its highest level against a basket major currencies since July. Gold reached its highest level in five months thanks to an increase in inflation expectations.

On Thursday, US stock futures increased, with the Nasdaq 100 and S&P 500 up 0.1 and 0.2% respectively. This suggests that there could be some relief for benchmark indices later in today, as the S&P 500 fell 0.8% on Wednesday, its largest one-day drop in a whole month. Meanwhile, the tech-heavy Nasdaq 100 lost 1.4%. The MSCI All-World index lost 0.13%, falling from its record highs.

The two-year Treasury yields, which have the highest response to changes in interest-rate expectations and are most sensitive to them, shot up 9 basis points after Wednesday's CPI numbers. The yield on two-year Treasury bonds, which is inversely related to the price, was at 0.52% when it last stood.

The five-year US breakeven inflation rate - which is a market-based indicator of medium-term investor expectations regarding consumer price pressures and consumer price rises - has soared to an all-time high of 3.1%.

Michael Hewson, chief strategist at CMC Markets, stated that there is a concern that consumers and markets will have to take on more price increases, along with the associated risks for profit margins and consumer inflation expectations.

Although gold trades in an opposite direction to the dollar, investors looking for protection from inflation that is more severe than they initially anticipated can benefit from those capital flows. Silver gained 0.8% to trade at $24.97 per ounce, while gold futures rose 0.4% at $1856.

The rise in volatility index VIX on Wednesday - often called "Wall Street's fear Index" - to its highest point in a month highlighted the more cautious mood.

The decline in the value of local currencies against the dollars helped Asia's stock markets to ignore inflation concerns. The yen was 0.2% lower against the dollar. The Nikkei rose 0.6% while the Shanghai Composite closed higher 1.2% and the Hang Seng saw a 1% rise.

The European data showed that the UK's economy contracted in the three months ending September, according to Thursday's data. According to the Office for National Statistics, third quarter gross domestic product grew by 1.3%, which is less than what was expected after the 2.5% growth.

Hussain Mehdi (macro and investment strategist at HSBC Asset management) stated that the UK's growth has slowed following economic reopening and amid labour and goods shortages.

"The near-term outlook is still uncertain, with higher inflation expected to weigh on household spending power. However, the Bank of England could still increase rates before year end due to concerns about a wage-price spiral.

The pound fell against the euro and the dollar by 0.1%. However, blue chips in the UK got a boost thanks to the weaker currency.

Last day, the FTSE 100 rose 0.3%, making it one the most performing indices in the area. This was in contrast to a flat performance by the Stoxx 600, and a 0.2% drop in the DAX.