Global markets were shaken by renewed inflation fears on Thursday as oil prices pushed above $100 a barrel, government bond yields climbed to multi-year highs and investors braced for the latest US consumer price figures.
The prospect of a prolonged conflict in the Middle East sent energy prices sharply higher, adding to pressure on central banks already struggling to contain inflation. Brent crude remained above $100 a barrel, while US crude rose by about 7 per cent during the session.
Shares fell across Europe and the United States. The Dow Jones Industrial Average and S&P 500 both closed about 0.6 per cent lower, while the technology-heavy Nasdaq dropped roughly 1 per cent.
Investors are focused on Friday’s US CPI report, due at 8.30am Eastern Time, which will provide one of the final major indicators before the Federal Reserve’s next policy decision. The Bureau of Labor Statistics has scheduled the release for September 11, covering inflation in August.
Markets were already leaning towards a higher chance of a rate increase next week after US producer price data proved stronger than expected, although it was not regarded as exceptionally high. The probability of a quarter-point rise was being priced at about 70 per cent, according to market measures cited by Reuters.
The latest surge in energy costs has also pushed up inflation expectations. One-year US inflation swaps have risen by almost one percentage point since the start of August to about 2.7 per cent, while consumer surveys continue to show expectations well above the Federal Reserve’s 2 per cent target.
Bond yields climb as inflation pressure builds
The bond sell-off intensified, with long-term UK gilt yields reaching their highest level in almost three decades. French 30-year borrowing costs rose to their highest in more than 20 years, while the equivalent US yield reached its highest point since 2007.
Higher yields reflect concerns over energy prices, government borrowing, fiscal policy and the credibility of central banks. They also increase borrowing costs for households, businesses and governments, threatening to weigh on economic growth even as policymakers try to prevent inflation from becoming entrenched.
The European Central Bank raised interest rates for the second time this year on Thursday, warning that the energy shock could keep price pressures elevated for longer than previously expected. President Christine Lagarde described the decision as straightforward, while investors began to price in further increases as soon as October.
The euro weakened against the dollar after the ECB decision, while the dollar strengthened broadly. Copper and gold fell, and European natural gas prices reached their highest level since 2022.
Donald Trump added another source of uncertainty for markets by proposing a $5,000 payment to every US adult if Republicans win November’s midterm elections. The proposed “Trump dividend” would come as investors were already assessing the inflationary risks posed by higher energy prices and loose fiscal policy.
Attention now turns to Friday’s inflation figures, alongside preliminary data on US consumer inflation expectations from the University of Michigan. A hotter-than-expected reading could strengthen the case for another Federal Reserve rate rise and extend the pressure on bonds, equities and currencies.
