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GLOBAL MARKETS-Stocks tumble, dollar rallies as soaring U.S. inflation implies an aggressive Fed

GLOBAL MARKETS-Stocks tumble, dollar rallies as soaring U.S. inflation implies an aggressive Fed

Reuters · 09/13/2022 14:56
GLOBAL MARKETS-Stocks tumble, dollar rallies as soaring U.S. inflation implies an aggressive Fed

Updates to afternoon prices, adds commentary

Dollar rallies after inflation's upward surprise

Global stock index in the red, Wall Street stocks sell off

Oil prices lose ground, Treasury yields rise

By Sinéad Carew

- The dollar index reversed course on Tuesday to rally sharply and U.S. stocks sank while Treasury yields climbed after data showed U.S. consumer prices rising faster than expected in August, prompting bets for more aggressive Federal Reserve rate hikes.

Oil futures turned red after the Labor Department data on Tuesday showed that declining gasoline prices in August were offset by gains in rent and food costs. The Consumer Price Index gained 0.1% last month versus expectations for a 0.1% decline and after being unchanged in July.

U.S. stock indexes had rallied on Monday after also gaining ground the week before as investors had bet Tuesday's data would show some dampening in inflation and provide a path for the Fed to ease its policy tightening. .N

"Moderating inflation is key to higher equity prices and at the moment inflation is running hot. That implies volatility will remain more the than the exception into year-end." said Terry Sandven chief equity strategist at US Bank Wealth Management in Minneapolis.

"It clearly suggests the Fed week will deliver more of the same and remain unwavering in their dispute to tame inflation."

The Dow Jones Industrial Average .DJI fell 967.37 points, or 2.99%, to 31,413.97, the S&P 500 .SPX lost 135.93 points, or 3.31%, to 3,974.48 and the Nasdaq Composite .IXIC dropped 510.05 points, or 4.16%, to 11,756.36.

"With the rally over the last week and yesterday, the market's risk reward coming into this report was a little skewed to the downside anyway even if we did get a report that was in-line or slightly below expectations. This report was a surprise with hotter inflation," said Mona Mahajan, senior investment strategist at Edward Jones.

"This was another disappointment. It's the old Charlie Brown analogy. Every time we're ready to kick the ball it's moved away from us."

The pan-European STOXX 600 index .STOXX closed down 1.55% while MSCI's gauge of stocks across the globe .MIWD00000PUS was down 2.69%.

In currencies, the dollar index =USD rose 1.377%, with the euro EUR= down 1.32% to $0.9985.

The Japanese yen weakened 1.03% versus the greenback at 144.31 per dollar, while Sterling GBP= was last trading at $1.1517, down 1.39% on the day.

"This is going to put the idea of transitory inflation to bed for and anchor U.S. yields and the dollar substantially higher. The key thing here is that we're looking at -certain odds on a 75-basis-point move week," said Karl Schamotta, chief market strategist at Corpay in Toronto. FRX

Meanwhile, U.S. Treasury yields surged and a recession warning - the yield curve inversion - widened after the inflation data also bucked bond investor expectations implying that the Fed will crack down further on inflation.

Benchmark 10-year US10YT=RR last fell 18/32 in price to yield 3.4293%, from 3.362% late on Friday. The 30-year bond US30YT=RR last fell 1/32 in price to yield 3.5139%, from 3.513%. The 2-year US2YT=RR last fell 12/32 in price to yield 3.7643%, from 3.571%.

The gap between yields on two- and 10-year US2US10=RR, seen as a recession harbinger, was at -33.9 basis points. US/

Oil prices reversed earlier gains to swing lower on Tuesday after the inflation data implied more hefty rate hikes from the Fed and renewed COVID-19 curbs China, the world's second-largest oil consumer, also weighed on crude prices.

Oil is generally priced in U.S. dollars, so a stronger greenback makes the commodity more expensive to holders of other currencies.

U.S. crude CLc1 settled down 0.54% to $87.31 per barrel and Brent LCOc1 was at $93.38, down 0.66% on the day.

The climbing dollar also put pressure on gold prices. Spot gold XAU= dropped 1.1% to $1,704.47 an ounce. U.S. gold futures GCc1 fell 1.45% to $1,705.00 an ounce.

(Additional reporting by Caroline Valetkevitch in New York, Marc Jones in London, Yoruk Bahceli in Amsterdam; Editing by Louise Heavens and Nick Zieminski)


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