LONDON/WASHINGTON, Sept 11 : A selloff in global equity markets paused on Friday as oil prices retreated from a four-month high, but accelerating U.S. consumer inflation boosted expectations for a rate hike from the Federal Reserve next week, keeping bond yields elevated. The Consumer Price Index increased 0.4 per cent last month after edging up 0.1 per cent in July, the Labor Department's Bureau of Labor Statistics said."Today’s inflation data have done nothing to change our view that the Fed is behind the curve," said David Rees, head of global economics at Schroders. "While headline inflation is being pushed around by rising energy prices, the bigger picture is that the economy is running hot and domestically generated inflation is grinding higher."
Traders were quick to add to bets for a rate hike from the Fed at its two-day meeting next week. Markets now see about an 85 per cent chance of a quarter-point hike, compared with around 67 per cent prior to the data. HIGHER FOR LONGERBrent crude hit a four-month high of $109.97 a barrel on Friday after a 6 per cent jump the day before, but it soon ran into selling pressure and was last down about 3.3 per cent at $104.04. It was still set for a weekly rise of over 8 per cent. Oil flows remained restricted through the Strait of Hormuz as the U.S. and Iran traded attacks, although prices have fallen after the Financial Times reported that foreign ministers in the Middle East were trying to work out a temporary deal to manage shipping through the waterway.But markets are still pricing in the risk of a protracted war. Comments from President Donald Trump that the conflict could last beyond the November midterm elections haven't helped, with bond yields surging globally on heightened inflation fears. "Markets are pricing in a scenario of higher rates for longer," said Gustav Helgesson, macro strategist at SEB. The benchmark 10-year Treasury yield was slightly lower on Friday at 4.94 per cent, helped by retreating oil prices. It briefly touched its highest in almost three years at 4.9915 per cent immediately after the inflation data.The 30-year yield scaled another 19-year top of 5.424 per cent before falling back to 5.318 per cent. Bond yields move inversely with prices. In Europe, the 10-year German Bund yield was up 1 bp for the day and up 17 bps for the week, its biggest weekly rise since March. TIGHTER POLICYAnalysts at JPMorgan now expect eight of the nine developed-market central banks to hike interest rates by the year end, including the Fed, BOJ, all four main central banks in Europe, and the reserve banks of Australia and New Zealand."The tightening is for now expected to remain shallow, but risks to our forecasts lean in the direction of more action in the face of resilient growth, sticky core inflation, and commodity price pressures," they said in a note.The European Central Bank raised interest rates on Thursday for the second time this year and some officials see more tightening ahead with October in play. RELIEF FOR EQUITIESWall Street opened the day higher, as investors took comfort from a dip in oil and gas prices, although major bourses were still set for sharp weekly falls. The Dow Jones Industrial Average was up 0.96 per cent in early trading, while the S&P 500 climbed 0.94 per cent and the Nasdaq Composite jumped 1.02 per cent. The pan-European STOXX 600 was up 0.7 per cent on Friday but down 1.5 per cent this week. MSCI's gauge of stocks across the globe was last up 0.5 per cent. The U.S. dollar rose with higher Treasury yields, having gained 0.4 per cent on Thursday against its major peers. It was steady on Friday at 99.11. Gold rose 1.8 per cent to $4,392 an ounce after dropping nearly 2 per cent on Thursday.
