Stocks fall, yields rise after hotter than expected inflation reading

A global index of stocks fell on Friday while U.S. Treasury yields rose after a July inflation reading showed prices rising slightly faster than expected, fuelling expectations the Federal Reserve will keep interest rates higher for longer.

The U.S. producer price index (PPI) for final demand rose 0.3% in July, according to the Labor Department. This compared with economist expectations for 0.2%. And in the 12 months through July, the PPI rose 0.8% against estimates for a 0.7% advance. However, data for June was revised lower to show the PPI unchanged instead of nudging up by the previously reported 0.1%.

On Thursday, Wall Street’s main indexes had finished flat, giving up most early gains on milder-than-feared consumer price inflation data.

“We think there’s some reassessment of inflation going on with investors looking further under the hood. Disinflation has been very rapid in the past months at the top level but that may be levelling out here a little,” said Paul Christopher, head of global investment strategy at Wells Fargo Investment Institute in St Louis.

Friday’s data suggests the Fed will need to keep rates higher for longer and “it puts additional rate hikes back on the table for this year,” said Christopher who noted that while some people were taking profits in response, others with cash on the table were stepping in to buy the dip.

The Dow Jones Industrial Average (.DJI) rose 27.49 points, or 0.08%, to 35,203.64, the S&P 500 (.SPX) lost 13.62 points, or 0.30%, to 4,455.21 and the Nasdaq Composite (.IXIC) dropped 103.59 points, or 0.75%, to 13,634.40.

The pan-European STOXX 600 index (.STOXX) fell 1.09% and MSCI’s gauge of stocks across the globe (.MIWD00000PUS) shed 0.62%.

Emerging market stocks (.MSCIEF) dropped 1.10%. Earlier Asian stocks fell to a one-month low and MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) closed 1.13% lower.

Investor optimism was also kept in check by San Francisco Federal Reserve Bank President Mary Daly saying that more progress was needed before she would feel comfortable the Fed has done enough to combat inflation.

In currencies, the dollar index rose 0.107%, with the euro down 0.18% to $1.0959.

The Japanese yen weakened 0.06% versus the greenback at 144.81 per dollar.

Sterling was last trading at $1.2704, up 0.23% on the day after GDP data showed Britain eked out unexpected growth in the second quarter, helped by a strong June performance.

On the U.S. Treasuries side, yields rose after the hotter than expected PPI. Benchmark 10-year notes were up 6.2 basis points to 4.144%, from 4.082% late on Thursday. The 30-year bond was last up 3.2 basis points to yield 4.2651%, from 4.233%.

The 2-year note was last was up 6.9 basis points to yield 4.8904%, from 4.821%.

In commodities, oil prices were slightly higher on OPEC producer group optimism that oil demand will be robust in 2024 as it also nudged up its expectations for global economic growth.

U.S. crude rose 0.4% to $83.15 per barrel and Brent was at $86.74, up 0.39% on the day.

The International Energy Agency (IEA), however, said demand growth for oil next year will be slower than previously forecast, citing lacklustre macroeconomic conditions, a post-pandemic recovery running out of steam and the burgeoning use of electric vehicles.

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