On Wednesday, world stocks wavered, as investors were digesting the US inflation data report, which showed that consumer prices in the country had risen 9.1% in June. This marked the biggest increase in CPI in four decades, which pushed Americans to dig deeper in order to pay for healthcare, gasoline, food, and rent.
Markets went wild after the report and the euro pierced parity for the first time in 2 decades i.e. touched 1-to-1 against the US dollar. Investors also became concerned that the Federal Reserve would introduce a supersized rate hike in response.
Central bank expectations
Initial expectations were of a 75 basis points increase in the interest rate this month at the US Federal Reserve’s meeting next week. However, such strong inflation data prompted traders to price in a possible increase of 100 basis points in the interest rate.
In the last couple of weeks, a number of central bankers have signaled that they would be in full support of a rate hike of 75 basis points for the second time in their next policy meeting. But, it is possible that their views could change, considering the Labor Department’s data. It showed that the consumer price index had climbed to 9.1% last month because of the rising costs of food, gas, and rent.
European and US bourses stumble
European stocks had already stumbled because of worries of an economic recession, but the CPI number turned out to be higher than forecasts and this led to more worries. There was a 1.01% loss in the continent-wide STOXX 600 index, while the MSCI’s gauge of world stocks fell by 0.31%.
On Wednesday, US stocks also finished the day moderately lower, after investors had to deal with the hotter-than-expected inflation numbers. Early in the day, all three of the US indexes reached lows, but they did move into positive territory in the session. However, the closing bell saw them all in the red.
There was a 0.67% fall in the Dow Jones Industrial Average, while a 0.45% decline was recorded in the S&P 500. Meanwhile, the Nasdaq Composite shed 0.15% for the day.
Even though the euro brushed parity very briefly, it had a big impact. The CAC 40 in France and the DAX in Germany ended up doubling their morning losses to 1.4% and 1.5%, respectively. The FTSE 100 in London was also close, as a rise in gas prices by 4% further added to the pressure.
The Bank of Canada also raised its main interest rate by a whopping 100 basis points on Wednesday in order to tame inflation, which took the markets by surprise. It has become the first G7 country to increase interest rates so aggressively in this economic cycle.
Market analysts said that the 9.1% CPI was the highest in 40 years and the only good news to emerge was that core inflation had come down. They said that economic prospects for Europe are getting worse and this would take its toll on the euro.