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US stock futures and Treasuries tumble after hot inflation report

Wall Street stock futures and US government bonds dropped on Thursday as a hotter than expected inflation report fuelled concerns that the Federal Reserve will raise interest rates more aggressively.

Contracts tracking the broad S&P 500 slid 1.7 per cent ahead of the New York opening bell, while those tracking the Nasdaq 100 dropped 2.5 per cent. Europe’s regional Stoxx 600 lost 0.7 per cent, after Hong Kong’s Hang Seng closed 1.9 per cent lower.

US government bonds came under selling pressure following the inflation report, with the 10-year yield adding 0.07 percentage points to 3.97 per cent and the two-year yield – which is sensitive to interest rate expectations – adding 0.14 percentage points to 4.43 per cent.

Those moves came as the closely watched US consumer price index reading for September landed at 8.2 per cent, marking a slight easing in the annual rate of inflation from 8.3 per cent in August but above economists’ forecast of 8.1 per cent.

The ‘core’ CPI reading came in at 6.6 per cent, above expectations of 6.5 per cent and the previous month’s reading of 6.3 per cent.

Market participants have scrutinised reports on price growth and the state of employment in the world’s largest economy for signs of how far and fast the Fed and its international peers will tighten monetary policy. Fears have intensified this year that rate-setters will turn the screws into a protracted slowdown.

The Fed has already raised borrowing costs by 0.75 percentage points at its past three meetings, taking its benchmark interest rate to a range of 3 to 3.25 per cent. Markets are pricing in expectations of a fourth consecutive increase of similar magnitude.

“This week’s CPI will be the most important catalyst into the November 2 Fed meeting,” JPMorgan said in a note to asset management clients ahead of the inflation report. Another three-quarter-point increase “feels like a foregone conclusion but the following two meetings lack a consensus.”

The Fed said in minutes from its September monetary policy meeting, released late on Wednesday, that the central bank was concerned about doing “too little” to stamp out soaring inflation.

Equity and bond markets have come under acute pressure this year, pummelled by rising interest rates and the prospect of monetary policy screws being twisted even further.

Higher borrowing costs have damaged the appeal of more speculative stocks that were winners earlier in the coronavirus pandemic, biting into their projected cash flows, which are typically modelled into the future. The tech-heavy Nasdaq Composite share index has tumbled by a third this year.

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