Stocks and bonds under pressure after gloomy UK inflation data

Stocks and bonds came under pressure on Wednesday after disappointing earnings from US retailer Target weighed on market sentiment already darkened by worse than expected UK inflation data.Wall Street’s S&P 500 share index was down 1.1 per cent by midday in New York, with travel companies among the biggest fallers. Cruise stocks Carnival, Norwegian Cruise Line Holdings and Royal Caribbean Cruises all fell more than 6 per cent. Target’s shares slid nearly 5 per cent after the US retailer missed earnings expectations for the three months to July 30, as its chief executive spoke of a “very challenging environment”. The group’s figures were posted just a day after earnings reports from retail bellwether Walmart and do-it-yourself chain Home Depot indicated some resilience in consumer spending despite inflationary pressures affecting customers. The technology-heavy Nasdaq Composite gauge lost 1.7 per cent on Wednesday. Those moves came as investors assessed another burst of economic data, starting with higher-than-feared inflation figures for the UK. The country’s consumer price index registered a 10.1 per cent year-on-year increase for July, greater than June’s figure of 9.4 per cent and above economists’ consensus forecast of a 9.8 per cent rise.The UK figures sparked a rout in the country’s short-dated debt, which is sensitive to changes in interest rate expectations, as investors raised their estimates of how high the Bank of England would lift borrowing costs to curb rapid price growth. The two-year gilt yield surged as much as 0.3 percentage points to 2.45 per cent, its highest since the global financial crisis in 2008. The 10-year gilt yield added as much as 0.19 percentage points to 2.32 per cent. Bond yields rise when their prices fall.That selling ricocheted across other countries’ debt markets, with Germany’s two-year Bund yield rising as much as 0.17 percentage points to 0.75 per cent. The equivalent US yield also jumped, adding 0.1 percentage point to 3.35 per cent. The yield on the 10-year US Treasury note, a proxy for borrowing costs worldwide, rose 0.09 percentage points to 2.92 per cent.Low summer trading volumes exacerbated the moves in gilts, said Lyn Graham-Taylor, rates strategist at Rabobank. “Gilts have sold off more than I’d expected given the news. The size of that move has dragged Bunds and Treasuries with it.”He said bond markets could sell off further, adding: “The central banks are less likely to blink in the face of declining growth prospects than the market is priced for.”The UK’s gloomy inflation figures came just a week after US data signalled that the rate of consumer price growth may be stabilising in the world’s largest economy.Separate numbers released on Wednesday showed that US retail sales held steady month on month in July, owing to a drop in spending at petrol stations as oil prices eased. Elsewhere in equity markets, Europe’s regional Stoxx 600 closed down 0.9 per cent, while Germany’s Dax slipped 2 per cent. In Asia, Japan’s Topix index closed up 1.3 per cent while Hong Kong’s Hang Seng rose 0.5 per cent.Later in the session, investors will scrutinise the minutes of the US Federal Reserve’s latest monetary policy meeting for any further clues about the central bank’s strategy for tackling inflation.“Not all eyes today are going to be on the UK,” said Florian Ielpo, head of macro at Lombard Odier. “They’re going to be on the Fed minutes. If anyone is in advance in the fight against inflation, it’s the Fed.”

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