MSCI's global stock index lurched to a July 2020 low and dollar and bond market borrowing costs rose on Thursday as another red hot US inflation reading cemented bets of another large Fed rate hike next month.
Traders flipped straight into selloff mode as the US Labor Department's consumer prices index (CPI) report showed headline CPI gaining at an annual pace of 8.2% and core CPI, which eliminates volatile food and fuel prices, at a higher than forecast 6.6%.
It sent what had been higher Wall Street futures plunging by more than 2% as the market opened and left the S&P 500, European stocks and MSCI's main world index all facing a seventh straight day in the red.
Global markets have suffered a torrid few weeks but the US CPI data cut to the heart of worries that major economies will need to be pushed firmly into recession for inflation to be brought into line.
The seemingly-unstoppable dollar sparked into life pushing the euro , yen and Swiss franc back down FRX although sterling was still up after a report that the British government was discussing scrapping more of its tax cuts laid out just last month.
Economists said the Fed is now expected to increase rates, which currently stand at 3.125%, by at least 75 bps next month and to continue raising them into next year. Markets show investors now expect US rates to peak at around 4.85% in March, compared with a peak of 4.65% in May that was priced in right before the data.
"After today’s inflation report, there can’t be anyone left in the market who believes the Fed can raise rates by anything less than 75 bps at the November meeting," Seema Shah, Chief Global Strategist at Principal Asset Management said.
"If this kind of upside surprise is repeated next month, we could be facing a fifth consecutive 0.75% hike in December with policy rates blowing through the Fed’s peak rate forecast before this year is over."
In the bond markets, borrowing costs were rising again.
The US 10-year benchmark yield jumped up past 4% again having been at 3.89%. Two-year rates hit 4.5% while German 10-year bond yields , rose to 2.304%, compared with 2.229% right before the US data.
Earlier European data had confirmed German harmonised inflation was 10.9% y/y in September and almost 10% in Sweden too.
Minutes of the Fed's latest policy meeting released on Wednesday had showed many officials "emphasized the cost of taking too little action to bring down inflation likely outweighed the cost of taking too much action".
Several policymakers did stress, however, that it would be important to "calibrate" the pace of further rate hikes to reduce the risk of "significant adverse effects" on the economy.
Treasury yields were choppy in Europe. with most of the equivalent European yields down a touch too.
Markets lay 90% odds for another 75 basis-point Fed rate hike in November, versus 10% probability of a half-point bump.
In Asia, widespread equity market weakness had seen Japan's Nikkei slip 0.6% and South Korea's Kospi tumble 1.8% overnight as news that Taiwanese chipmaking giant TSMC was seeing demand drop and was cutting its investment budget by at least 10% hit the wider region's tech sector. read more
Hong Kong's Hang Seng dropped 1.9% and mainland Chinese blue chips lost 0.3% to leave MSCI's index of Asia-Pacific shares close to 2 1/2-year lows.
"The risk of an over-tightening episode and some mishap in financial markets is higher than I can remember," said Tom Nash, a fixed income portfolio manager at UBS Asset Management in Sydney.
The dollar index, which gauges the greenback against six major rivals, jumped over 0.5% to 113.65 after the CPI data.
The US currency hit a fresh 24-year high of 147.2 yen and pushed the euro to a 2-week low. Sterling was still up after it had roared up almost 1.5% to $1.1263 on the reports of possible tax cut changes.
Benchmark 10-year gilt yields , which erupted after the UK government laid out tax cutting plans last month, had swung from a fresh 14-year peak at 4.632% to 4.25% in post CPI trading.
The Bank of England has insisted that its emergency bond market support will expire on Friday as originally announced, countering media reports of continued aid if necessary.
BoE Governor Andrew Bailey had riled markets on Tuesday by saying British pension funds and other investors hit hard by a slump in bond prices had until that deadline to fix their problems.
"I would say it's heroic to say the risk of some sort of systemic problem has been extinguished because these are big moves and we don't now how much deleveraging needs to be done," Janus Henderson's Paul O'Connor said. "Markets still feel very dysfunctional".
Meanwhile, crude oil markets regained their footing following a 2% slide on Wednesday amid worries over demand.
Brent crude futures bounced 23 cents, or 0.25%, to $92.69 a barrel, while U.S. West Texas Intermediate crude was up 21 cents, or 0.2%, at $87.44 a barrel.
Last week, the producer group comprising the Organization of the Petroleum Exporting Countries (OPEC) and allies including Russia pushed prices higher when it agreed to cut supply by 2 million barrels per day (bpd).
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