US stocks weaken ahead of inflation print

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US stocks and government bonds dipped modestly on Thursday ahead of consumer price data tomorrow, which will inform the Federal Reserve at its policy-setting meeting next week.

The move also came after the European Central Bank left the door open to an extra-large interest rate rise in September. The hawkishness from the ECB and the possibility of a high US inflation print raised questions for investors about global growth, inspiring a move out of risk assets.

The blue-chip S&P 500 had fallen 0.8 per cent by mid-afternoon in New York, while the tech-focused Nasdaq Composite was down 1.1 per cent.

The US consumer price index is expected to show an 8.3 per cent pace of inflation in May, steady with the previous month, just off the four-decade highs hit earlier this year. The Bloomberg survey of economists, however, has underestimated the year-over-year pace of inflation for the previous two months.

The 10-year US Treasury yield rose 0.01 percentage points to 3.03 per cent. The policy-sensitive two-year yield rose 0.03 percentage points to 2.8 per cent. The five- and 10-year break-even rates — measures of market expectations for inflation in five and 10 years’ time — both rose.

The ECB said in a monetary policy statement that it would lift its main deposit rate from minus 0.5 per cent by a quarter point in July and by another unspecified amount in September.

“If the medium-term inflation outlook persists or deteriorates, a larger increment will be appropriate at the September meeting,” the ECB said.

The ECB is tightening monetary policy as part of a global shift to higher borrowing costs to battle inflation, which began rising in 2021 as coronavirus shutdowns ended and was exacerbated by Russia’s invasion of Ukraine.

The central bank, which has also bought up vast quantities of eurozone government bonds in recent years to lower financing costs, confirmed that it would end net purchases from July 1 and upgraded its inflation forecasts.

In Europe, the regional Stoxx 600 share index extended losses from earlier in the day to close 1.4 per cent lower. An FTSE index of Italian stocks tumbled 1.9 per cent and Germany’s Xetra Dax lost 1.7 per cent.

Yields on German, Italian, Spanish and Greek government bonds raced higher as investors worried about the economic fallout from the end of ultra-supportive monetary policies. The euro weakened against the dollar, falling 0.7 per cent to $1.064.

“People are getting antsy ahead of the CPI tomorrow and what that might mean for the Fed tomorrow. We’re in wait-and-see mode,” said Lou Brien, market strategist at DRW Trading.

“Now the ECB seems to be ready to step up to the plate and now people may be thinking that if we get a strong CPI tomorrow, the Fed will leapfrog the ECB.”

Brent crude, the oil benchmark, was roughly flat at $123.51 a barrel, having advanced nearly 60 per cent so far this year.

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