LONDON – World stocks fell towards fresh 2022 lows and the Japanese yen slid to levels not seen in nearly a quarter of a century on Monday as red-hot US inflation fueled worries about even more aggressive policy tightening in a big week for central banks.
The substantially higher-than-expected US CPI print on Friday was hard to digest for investors, who sold both bonds and equities and quashed expectations that policymakers were starting to gain the upper hand in capping soaring prices.
With inflationary signs showing no signs of abating, investors cut exposure to risky assets.
An index of world stocks is down 0.7 percent, just shy of a new 2022 low. European stock indices are a sea of red in early trading with benchmark shares down nearly 2 percent while US stock futures indicated a lower start.
"This is happening in spite of the actions that have so far been taken by central banks and which are stoking fears that they will have to go harder and faster if inflation is to be tamed, the cost of which is being increasingly seen as lower growth and potentially recession," said Stuart Cole, chief macro strategist at Equiti Capital in London.
Bond markets faced the brunt of the selloff with short-dated US bond yields surging to their highest levels since late 2007 while the yield curve as measured by the gap between 10 and 2-year US debt yields teetered above zero, a level traditionally seen as a harbinger of recession.
European bonds were also caught up in the broadening debt market selloff after a hawkish European Central Bank meeting last week, with two-year German bond yields rising above 1 percent for the first time in more than a decade.
Money markets are pricing in a total of almost 250 bps in rate hikes by the US Federal Reserve to the end of the year with only five meetings remaining with some investment banks pencilling in a 75-basis-point hike at a policy meeting this week.
Expectations of even more aggressive rate hikes from global central banks prompted investors to ramp up their bearish bets on global growth. This is a big week for central banks with the Fed, the Bank of England and Swiss National Bank holding policy meetings.
Multiple indicators of growth in markets slumped on Monday from technology shares in Hong Kong to the Australian dollar as investors fled to the perceived safe haven shelter of the US dollar.
The dollar climbed as high as 135.22 yen, its highest since October 1998, buoyed by a rise in Treasury yields that continued into Tokyo trading while the British pound was down more than half a percent after data showed the UK economy unexpectedly shrank in April.
Leading cryptocurrency bitcoin slumped more than 6 percent to the lowest since December 2020 at $24,888.88.
Meanwhile, crude oil prices dropped, with Brent crude futures down 2 percent to $119.20 a barrel as growth concerns dominated sentiment.