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Yields and stocks dip ahead of US inflation data

US bond yields and world equity markets dipped yesterday ahead of a widely anticipated US inflation report later this week that may provide some indication of the pace of future interest rate hikes by the Federal Reserve.

Major stock indexes in the US and Europe inched lower and a gauge of global equity performance fell modestly, with gains in Asian heavyweights Tencent, Samsung, Alibaba and Taiwan Semiconductor offsetting some downward pressure.

Economists expect the US consumer price index to have risen month over month by 0.3 per cent in January with a core reading of 0.2 per cent when the Labor Department report is released today, according to a Reuters poll.

The CPI data is one of the most eagerly awaited macroeconomic reports in recent memory, said Mike Terwilliger, portfolio manager of Resource Liquid Alternatives for the Resource Credit Income Fund. “After years of pronouncing inflation ‘dead’, the market is now suddenly focused on and dreading inflation, which of course was at the cornerstone of this most recent period of market volatility,” he said.

The prospect of heightening inflation and a budget that contemplates greater deficit spending could lead to a radical repricing of all fixed-income assets.

Gennadiy Goldberg, interest strategist at TD Securities, New York, said the US government debt market was on edge. “It’s unwilling to put in strong positions ahead of that report. People want to see if it would confirm the recent trend of strong inflation and growth,” Mr Goldberg said.

A faster pace of inflation is likely to fan fears that the Fed will increase the number of rate hikes this year – the same worries that sparked the market rout that began February 2 after a jobs report showed the strongest annual wage growth since 2009.

“I expect a continued stream of volatility, driven by uncertainty among investors with fears of accelerating rates. I don’t think that’s going away any time soon,” said Andre Bakhos, managing director at New Vines Capital LLC in Bernardsville, New Jersey.

MSCI’s gauge of stock markets in 47 countries was down just 0.03 per cent and its emerging markets index rose 1.00 per cent.

The pan-European FTSEurofirst 300 closed down a provisional 0.56 per cent and stocks on Wall Street trended lower.

The Dow Jones fell 118.7 points, 0.48 per cent, to 24,482.57. The S&P 500 lost 8.9 points, 0.34 per cent, to 2,647.1 and the Nasdaq Composite dropped 13.40 points, 0.19 per cent, to 6,968.56.

The market sell-off that led stocks to decline from a last month’s peak and jump in volatility will not damage the US economy’s strong prospects, Mester told the chamber of commerce in Dayton, Ohio.

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