Stocks, futures extend losses; sovereign bond selloff eases

Bloomberg

Stocks extended declines on Friday along with American index futures as red-hot US inflation stoked bets on faster Federal Reserve interest-rate hikes amid febrile speculation about the monetary-policy outlook.
The Stoxx Europe 600 index dropped more than 1%, with technology and real-estate shares leading the decline. Carmakers outperformed after strong results from Mercedes-Benz AG. The benchmark remains on track for its first weekly advance this year. Contracts on the S&P 500 and Nasdaq 100 retreated along with an Asia-Pacific stock gauge.
A selloff in sovereign bonds eased, with the 10-year Treasury yield falling about three basis points to hover around the 2% level. The two-year yield was little changed after jumping the most since 2009 on Thursday. Bonds across Europe were mixed, with Germany’s 10-year yield dropping two basis points. The dollar rose and commodity-linked currencies slid. The pound erased a decline after data showed the UK economy expanded at the fastest pace since World War II last year.
Bonds were pummeled by the surprise jump in US inflation that stirred hawkish comments from St. Louis Fed Chair James Bullard, who said he supports raising rates by a full percentage point by the start of July, including the first half-point hike since 2000. He raised the possibility of a move in between scheduled policy reviews. Other Fed officials, though, are in no rush to raise rates prior to their meeting next month, nor does a 50 basis points March move appear likely yet.
Markets are struggling to adjust to the withdrawal of pandemic-era stimulus as officials fight inflation. The flattening Treasury yield curve suggests investors expect slowing economic growth as the Fed increases rates and reduces its balance sheet to curb price pressures.
“There is probably some disagreement within the FOMC on whether inflation can be reduced quickly by aggressive policy that signals an unwavering commitment to get inflation back to target,” Steven Englander, global head of G-10 FX research at Standard Chartered Bank, wrote in a note. Englander expects quarter-point Fed hikes in March, May, June and July, but added “there is a case for even more front-loading.”
US inflation hit 7.5% in January, a fresh four-decade high, with goods prices soaring and costs for services also starting to pick up. Traders are betting the Fed will raise policy rates
by 175 basis points by the end of the year.
Meanwhile, European Central Bank President Christine Lagarde warned a rush to tighten monetary policy could harm the region’s economic rebound, and ECB Chief Economist Philip Lane defended his view that record euro-area inflation is set to ease without tougher action. The euro fell.
In Japan, the central bank finally acted to keep a lid on bond yields, offering to buy an unlimited amount of bonds Monday at a fixed rate. There is no cash Treasuries trading in Asia due to a Japan holiday on Friday.
The Stoxx Europe 600 falls 1% as of 10:29 am London time and futures on the S&P 500 fall as much as 0.5%.
While futures on the Nasdaq 100 drop 0.7%, futures on the Dow Jones Industrial Average also fall 0.4%. The MSCI Asia Pacific Index slumps 0.6% and the MSCI Emerging Markets Index also drops 0.9%.
The Bloomberg Dollar Spot Index rises 0.1% and the euro falls 0.4% to $1.1387.
While the Japanese yen was little changed at 116.04 per dollar, the offshore yuan was little changed at 6.3626 per dollar and the British pound was also little changed at $1.3554.
The yield on 10-year Treasuries declined two basis points to 2.00% and Germany’s 10-year yield declined two basis points to 0.26%.
Britain’s 10-year yield was little changed at 1.52%.