Recently, there was a big drop in US government bonds, and it affected markets around the world. This happened because US inflation came in higher than expected. Investors now believe that the Federal Reserve may not lower interest rates as much this year.
In Australia and New Zealand, bond yields went up after US Treasury yields increased. A bond yield goes higher when bond prices fall. For example, the 10-year US Treasury yield rose by nine basis points in one day—the biggest jump since December.
On Thursday, Australian shares opened slightly higher, and stocks in Japan and Hong Kong also rose. US-listed Chinese companies saw a significant increase of 2.7%. Despite a small decline in the S&P 500 (down 0.3%) and a slight rise in the Nasdaq 100 (up 0.1%) on Wednesday, US stock futures showed promise for a rebound.
Oil prices steadied after falling on news about US-Russia talks regarding Ukraine, and gold continued to rise after reaching a record high earlier in the week. The strength of the US dollar changed little, while the Japanese yen remained stable, having dropped over 1% on Wednesday. The euro also held onto its previous gains against the dollar.
The main reason for all these changes was the unexpected rise in US prices, leading traders to think the Federal Reserve might only cut rates once this year, possibly in December. The US consumer price index went up by 0.5% in January, which is the biggest increase since August 2023. Core CPI, which doesn’t include food and energy costs, also rose more than expected.
Ellen Zentner from Morgan Stanley said, “The Fed has to be patient about rate cuts until we see inflation dropping clearly.” Fed Chair Jerome Powell mentioned that while they’ve made progress in tackling inflation, they still have more work to do.
Seema Shah from Principal Asset Management commented, “This inflation report may worry the Fed. If inflation keeps rising, it could stop them from cutting rates this year.”
In Asia, important data is set to be released, including producer prices for Japan and a decision on interest rates in the Philippines. Meanwhile, India’s Prime Minister Modi is expected to meet Donald Trump at the White House.
Chris Zaccarelli from Northlight Asset Management believes that the Fed might even have to raise rates instead of cutting them, which could lead to negative reactions in the market.
While the recent rise in US inflation caught many off guard, Bloomberg Economics noted that it mainly happened due to typical price changes at the start of the year. Even though this spooked investors, it’s essential to remember that the increase is influenced by seasonal trends.
The S&P 500 index saw minor declines after initially falling, but some companies, like Tesla and Meta Platforms, showed strong performance. Cisco Systems also surged after giving a positive sales forecast.
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