US inflation takes investors on the wrong foot

Germany’s DAX index seen at the Frankfurt Stock Exchange (Reuters) – European stocks ended sharply lower on Tuesday after news of an unexpected rise in consumer prices in the United States challenged expectations rates and revived fears of recession, casting a chill over markets that had been dragged down for several days by renewed optimism. In Paris, the CAC 40, which rose by almost 1% at the start of the afternoon, ended down 1.39% (87.9 points) at 6,245.69 points. In London, the FTSE 100 fell 1.09% and in Frankfurt, the Dax lost 1.59%. The EuroStoxx 50 index fell 1.65%, the FTSEurofirst 300 1.37% and the Stoxx 600 1.55%. At the time of the close in Europe, Wall Street, which remained on four sessions of rise in a row, sank into the red, the Dow Jones losing 2.78%, the Standard & Poor’s 500 3.17% and the Nasdaq Composite 4.07%. While the consensus expected them to fall slightly, consumer prices in the United States rose 0.1% last month, and their annual rise slowed less than expected, to 8.3%. These figures led investors to revise sharply higher expectations for the evolution of US interest rates as well as the risk that the tightening of policy would slow down economic activity. Eight days from the next decisions of the Federal Reserve, the estimated probability of a three-quarters point increase in the federal funds rate thus reaches 79% and that of an even larger increase, of 100 basis points, stands at 21% according to the real-time FedWatch barometer. However, a 75 basis point increase would be enough to bring rates to a level that the majority of observers consider likely to weigh on economic growth and push up unemployment. The August CPI reflects “a frustratingly slow deceleration in core price pressures,” said Frederik Ducrozet, director of macroeconomic research, and Thomas Costerg, senior economist at Pictet Wealth Management, in a note. RATES The release of US statistics triggered an immediate surge in US Treasury yields, which barely abated as the hours went by: the two-year, which was around 3.51% at the start of the day, rose to 3 .7518% and the ten-year rose from less than 3.3% to more than 3.43%. European yields followed suit: the German ten-year ended the day up more than eight basis points at 1.727%. They were already on the rise before the American figures, driven by the revision of inflation in Spain in August to 10.5% over one year and by the impact of the auctions of the day in the euro zone, for a total amount of more than 20 billion euros. EXCHANGES The dollar has also taken full advantage of the US CPI figures: while it was still losing ground before their publication, it now shows a jump of 1.13% against a benchmark basket. The euro fell close to parity with the greenback against nearly $1.02 at the day’s high. VALUES In Europe, none of the major listed sectors escaped the general downturn and among the most marked declines, that of real estate lost 3.86%, that of high technologies 3.21% and that of building 2.49%. The distribution compartment lost 3.46%, as British stocks suffered from the latest Kantar figures on the sector’s sales, in which several analysts saw confirmation of a slowdown in consumption: Tesco gave in 3.08% and Sainsbury’s 1.59%. Ocado, which fell 14.59%, also suffered from the downward revision of forecasts for its joint venture with Marks & Spencer (-3.79%). On the rise, UBS gained 0.68% after announcing an increase in its dividend and mentioning a possible overrun of its share buyback target. OIL The oil market is not immune to the general decline in market sentiment caused by US inflation, especially as this comes on top of persistent uncertainties about health restrictions in China. Brent fell 1.78% to 92.33 dollars a barrel and US light crude (West Texas Intermediate, WTI) 1.52% to 86.45 dollars. (Written by Marc Angrand)