Yields jump as hot inflation reports embolden hawks

BLOOMBERG

European stocks slipped as euro-area bond yields surged on Tuesday as hot inflation reports ramped up the stakes for the region’s central bank to battle rampant price pressures.
The Stoxx 600 fell 0.3%, trimming a 1.7% gain for February, in the wake of reports that showed accelerating inflation in France and Spain. US contracts were range-bound after a solid day of gains for the S&P 500 and tech-heavy Nasdaq 100.
The yield on two-year German government bonds jumped as much as 9 basis points to 3.17%, the highest since 2008. Treasury yields advanced, with the 10-year benchmark climbing four basis points towards 4%.
The latest set of data is likely to harden the resolve of central banks to keep ratcheting up rates to defuse still-hot inflation and resilient economies. French inflation accelerated to a record in February, while Spanish inflation unexpectedly quickened in February on higher electricity and food cost, increasing pressure on the European Central Bank to deliver more interest-rate hikes.
For the first time, money markets fully priced in a 4% ECB terminal rate by February 2024. That compares to a 3.5% rate expected at the start of the year and would exceed the peak for euro-area interest rates seen more than two decades ago.
US data on Monday further outlined the challenge facing the central bank. Pending home sales increased in January by the most since June 2020. Durable goods orders fell, but after accounting for a drop in transportation equipment rose more than expected. Orders placed with factories for business equipment also rose.
Traders are now pricing US rates to peak at 5.4% this year, compared with about 5% just a month ago. Federal Reserve Governor Philip Jefferson firmly stood by the central bank’s 2% inflation goal on Monday. A series of hawkish Fed speak this month has trimmed January’s gains across markets.
Elsewhere, oil was set for a fourth straight monthly decline as concerns about tighter monetary policy and swelling stockpiles in the US eclipsed optimism about rising demand in China. Gold headed for its worst month since the middle of 2021.
The Stoxx Europe 600 fell 0.3% as of 9:10 am London time and S&P 500 futures fell 0.1%
Nasdaq 100 futures fell 0.1% and futures on the Dow Jones Industrial Average fell 0.1%.
While the MSCI Asia Pacific Index fell 0.4%, the MSCI Emerging Markets Index fell as much as 0.5%.
The Bloomberg Dollar Spot Index was little changed and the euro was little changed at $1.0619.
The Japanese yen fell 0.3% to 136.64 per dollar and the offshore yuan rose 0.1% to 6.9510 per dollar. The British pound rose 0.2% to $1.2094.
While the yield on 10-year Treasuries advanced four basis points to 3.95%, Germany’s 10-year yield advanced seven basis points to 2.65% and Britain’s 10-year yield advanced five basis points to 3.85%.