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Stocks drop as US inflation runs hotter than expected

Inflation in the US came in higher in January than markets had expected, setting off fresh fears that the Federal Reserve (Fed) will keep interest rates higher for longer. Stock markets fell, the dollar strengthened and Treasuries yields shot up across the curve following the data release. At the same time, a series of macroeconomic data releases out of Europe increased hopes for interest rate cuts at the Swiss National Bank (SNB) and signalled that Germany’s economic woes may be slowly coming to an end.

Shane Strowmatt, LGT
Tempo di lettura
5 minuto
Inflation shown with icons

The US Consumer Price Index (CPI) was up 3.1% on the year in January, while economists had expected consumer price inflation to rise at just 2.9%. Core CPI - which strips out volatile food and energy prices - remained flat at 3.9%, much higher than the Fed’s 2% inflation target. Markets reacted immediately after the announcement. Yields on two-year and 10-year Treasuries both jumped about 15 basis points and were trading above 4.6% and 4.3%, respectively. Gold dropped from around USD 2030 to well under USD 2000 per ounce. In New York, stock markets were knocked off their recent all-time highs. The Dow Jones Industrial and S&P 500 each fell 1.4%. The interest-rate sensitive Nasdaq-100 tumbled 1.6%.

Most equity markets in the Asia-Pacific region were also down on Wednesday. In Tokyo, the Nikkei 225 lost 0.6% and in South Korea, the Kospi dropped 1.1%. In Australia, the S&P/ASX 200 closed 0.7% lower. Hong Kong’s Hang Seng Index, which reopened on Wednesday after a long weekend for the Lunar New Year, bucked the trend, trading up 0.9%. Markets in mainland China are closed for the festival all week.

In Switzerland, inflation also surprised, but to the downside in January. Consumer price increases decelerated to 1.3% in January when compared with the same month of the previous year, down from 1.7% in December. Economists had predicted an increase of 1.7% on the year in January as well. Core CPI dropped to 1.2%. The quick deceleration comes as a surprise because an increase to Switzerland’s value-added tax rate at the beginning of the year as well as higher energy prices were expected to drive CPI higher. Easing inflation, which has been within the 0%-2% target of the SNB for 8 months in a row, gives the SNB more room for manoeuvre at its next policy meeting in March. After Tuesday’s inflation announcement, the Swiss franc fell versus all major currencies. The SMI ended Tuesday’s session down 0.3%, while the Euro Stoxx 50 lost 1.2%.

The release of Germany’s ZEW Indicator of Economic Sentiment for February was a rare positive signal for Europe’s largest economy on Tuesday. The index, which measures analysts’ expectations for the economy and financial conditions, increased to 19.9 from 15.2 in January. However, the current conditions component fell to -81.7 from -77.3 in January. February’s current conditions reading was the lowest since the pandemic. Germany is facing multiple crises that are dampening economic growth, such as high energy prices in the wake of Russia’s invasion of Ukraine, low demand for German exports largely due to a slow economic reopening in China and record high interest rates in the eurozone. Germany was last in recession in late 2022 and early 2023 and its gross domestic product (GDP) shrank by 0.3% in 2023. Germany’s DAX lost almost 1% on Tuesday.

In the UK, wages excluding bonuses increased 6.2% in the fourth quarter when compared to the same period a year earlier. The unemployment rate also fell slightly to 3.8%, according to data released on Wednesday. The strong labour market data suggest the Bank of England may be slow to cut rates this year, with markets expecting three cuts this year, starting in August. The pound strengthened versus major currencies after the data release.

Corporate news in focus: Quarterly figures from Ahold Delhaize, Barrick Gold, Bilfinger, Cisco, Heineken, Norsk Hydro, Schindler, Sony, Thyssenkrupp.

Economic data in focus: UK Consumer Price Index, euro area gross domestic product.


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Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Editor: Alessandro Fezzi
Source: LGT Bank (Switzerland) Ltd.