European stocks open lower after US inflation boosts rate hike bets

FILE PHOTO – The DAX chart of the German stock price index is pictured on the stock exchange in Frankfurt, Germany, February 10, 2022. REUTERS/Staff

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LONDON, Feb 11 (Reuters) – European stock indices fell on Friday and the U.S. 10-year yield held near 2% after searing U.S. inflation data prompted investors to expect higher a tightening of monetary policy by the Federal Reserve.

Consumer prices in the United States posted the largest annual increase in 40 years, according to data released Thursday evening. Read more

The news fueled speculation that the Fed would raise rates by 50 basis points in March, up from 25. This hurt global equity markets as expectations of monetary policy tightening typically dampen investor appetite for risk-sensitive assets. Read more

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Wall Street stocks fell after the data and the weakness continued throughout the Asian session. The MSCI World Equity Index (.MIWD00000PUS), which tracks stocks from 50 countries, was down 0.4% on the day at 0850 GMT.

The European STOXX 600 fell 1%, with tech stocks leading the sell-off. But it was still on track for its biggest weekly gain since late December (.STOXX).

“Real inflation is out of control,” said Matteo Cominetta, senior economist at Barings Investment Institute. “It’s a story of overheating, pure and simple.”

“You have all these cost push factors on one side and then you have booming demand hitting that limited supply – it’s very hard to see how inflation could slow down anytime soon in the US”

The 10-year US Treasury yield hit 2% for the first time since August 2019 after the data and remained above that level during the Asian session.

At 09:02 GMT, it slipped to 1.997%.

European government bond markets were more mixed, with the German 10-year rate falling 2 basis points on the day to 0.263% .

European Central Bank President Christine Lagarde said in an interview that raising rates now would only hurt the economy.

Those comments were more dovish than the tone of the ECB meeting last week, when Lagarde surprised markets by opening the door to the ECB’s first rate hike in more than a decade to rein in record inflation. Read more

Barings’ Cominetta said that while he expects the Fed to raise rates by 25 or 50 basis points at its next meeting, he does not expect the European Central Bank to raise rates before early 2023.

He added that he expects volatility in fixed income markets in Europe as investors become increasingly reliant on economic data.

The euro was down 0.3% against the dollar at $1.1391, forecast for a 0.5% drop on the week as a whole.]

The US dollar index rose about 0.1%.

The pound sterling changed little against the dollar. UK GDP data showed the UK economy shrank less than expected in December. Read more

Oil prices fell as inflation data stoked fears of aggressive rate hikes, and gold also edged lower. Read more

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Reporting by Elizabeth Howcroft

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