European equities fell on Wednesday after the worst sell-off on Wall Street since June 2020, as warmer-than-expected US inflation data fueled bets on more aggressive rate hikes by the Federal Reserve.
The regional Stoxx Europe 600 fell 0.4 percent, adding to the losses from the previous session. The FTSE 100 also fell 0.5 percent even as UK inflation data for August came in cooler than expected. In Asian markets, Hong Kong’s Hang Seng index lost 2.4 percent, while Japan’s Topix fell 2 percent.
Those declines came after the US S&P 500-meter recorded its steepest drop since the early days of the pandemic, falling 4.3 percent on Tuesday, following higher-than-projected inflation for August.
Consumer prices in the world’s largest economy rose 0.1 percent in August from the previous month, official data shows, compared with expectations of a 0.1 percent decline. The annual rate came in at 8.3 percent, down from July’s 8.5 percent figure, but above economists’ estimates of 8.1 percent.
The inflation report prompted investors to raise expectations about how far and quickly the Fed will raise borrowing costs, as markets estimate a 1 in 3 chance that the US central bank will raise interest rates by a full percentage point this month. according to data from the CME Group based on futures trading on federal funds. A move of such magnitude would follow two consecutive 0.75 percentage point increases.
“Two historically excessive hikes this summer appear to have had a weaker direct impact on the inflation landscape than expected, leading markets to believe the Fed may be forced to make the rate hike of the century,” said JPMorgan strategists.
Markets now expect the Fed’s key interest rate to peak at about 4.3 percent in March 2023, up about 0.3 percentage points since Monday.
The tech-heavy Nasdaq Composite, whose components are seen as the most exposed to higher interest rates, closed 5.2 percent lower on Tuesday.
Mansoor Mohi-uddin, chief economist at Bank of Singapore, said the August consumer price index data “reinforces our belief that the Federal Reserve will remain aggressive”. He added that “the likelihood of further rapid rate hikes by the Fed will increase the risk of the US slipping into recession by late 2023 or early 2024.”
New data from Wednesday showed that inflation in the UK plunged below 10 per cent in the year to August, defying expectations that inflation would rise above July’s 10.1 per cent as a result of lower petrol prices.
Economists expect inflation in the country to hover around 10 percent through the fall, following Prime Minister Liz Truss’ pledge to protect households from rising gas prices.
In government bond markets, the yield on the two-year US Treasury bill, which is sensitive to changes in interest rates expectations and reached its highest level since 2007 on Tuesday, rose 0.03 percentage points to 3.79 percent. Bond yields rise when their prices fall.
Futures contracts tracking the S&P 500 closed 0.1 percent higher in early European trading on Wednesday.