World markets down after US inflation report

Traders expect the Fed to hike rates more than originally expected

NEW YORK – World markets slid on Wednesday after Wall Street fell its most since June 2020, as a report showed inflation had a surprisingly tight grip on the US economy.

European benchmarks were marginally lower while Asia posted larger losses. US futures edged higher, with Dow Industrials and S&P 500 contracts up 0.3%. European futures were lower.

Tuesday’s report showed US inflation slowed to just 8.3% in August, versus 8.1% expected by economists. That dashed hopes that inflation would return to more normal levels after peaking at 9.1% in June, allowing the Federal Reserve to moderate its rate hikes.

Now traders brace themselves for the Federal Reserve eventually raising interest rates more than expected to fight inflation, with all the attendant risks to the economy.

Germany’s DAX slipped 0.2% to 13,165.86 and the CAC 40 in Paris slipped 0.3% to 6,2275. Britain’s FTSE 10 was down 0.7% to 7,334.75. Futures for the Dow Industrials and the S&P 500 were both down about 0.3%.

Tensions between the US and China also weighed on sentiment. Chinese leader Xi Jinping and Russian President Vladimir Putin are set to meet later in the week, underscoring the countries’ warming ties as the West ramps up sanctions against Moscow over its invasion of Ukraine.

Thursday’s meeting in Samarkand, Uzbekistan, on the sidelines of a Moscow-Beijing-dominated summit, reflects the strong ties between the former communist rivals who are now in rivalry with the US

Meanwhile, the US is reportedly considering new sanctions against Beijing aimed at deterring aggression against Taiwan, a self-governing island democracy that claims China as its own territory.

Hong Kong’s Hang Seng Index fell 2.3% to 18,875.59 and the Shanghai Composite Index fell 0.8% to 3,237.54.

Tokyo’s benchmark Nikkei 225 fell 2.8% to 27,818.62, while Sydney’s S&P/ASX 200 fell 2.6% to 6,828.60. In Seoul, the Kospi lost 1.6% to 2,411.42.

On Tuesday, the Dow slipped more than 1,250 points and the S&P 500 fell 4.3% after Tuesday’s inflation report came out hotter than expected. The Nasdaq Composite closed 5.2% lower.

Bond prices also fell sharply, pushing up their yields.

The two-year Treasury yield, which is trending in line with expectations for Fed action, rose to 3.74% from 3.57% late Monday. The 10-year yield, which helps determine the trajectory of mortgages and rates on other loans, rose to 3.42% from 3.36%.

Traders now see a one in three chance that the Fed will hike interest rates by a full percentage point next week, four times the usual move.

The Fed has raised its federal funds rate four times this year, the last two hikes by three-quarters of a percentage point each. The rate is currently in a range of 2.25% to 2.50%.

Higher interest rates hurt the economy by making it more expensive to buy a house, car, or anything else that’s usually bought on credit. Mortgage rates are already at their highest level since 2008, hurting the housing industry. The hope is that the Fed can walk the tightrope of slowing the economy enough to wipe out high inflation, but not so much as to trigger a painful recession.

Tuesday’s data cast doubt on hopes for such a “soft landing”. Higher interest rates also hurt stock, bond and other asset prices.

Expectations of a more aggressive Fed have also helped the dollar extend its already strong gains for this year. The dollar has risen against other currencies in large part because the Fed has been raising interest rates faster and with larger margins than many other central banks.

This is particularly the case in Japan, where interest rates remain at minus 0.1%. The dollar bought 143.47 Japanese yen, down from 144.57 yen late Tuesday. The euro rose from 0.9969 cents to 0.9981 cents.

U.S. benchmark crude fell 47 cents to $86.84 a barrel in electronic trading on the New York Mercantile Exchange. On Tuesday, it lost 47 cents to $87.31. Brent crude, the international price standard, fell 53 cents to $92.64 a barrel. World markets down after US inflation report

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