Stocks fall, dollar gains as US inflation prompts bets to rise 100 basis points

LONDON, July 14 (Reuters) – European stocks fell in early trading on Thursday and the safe-haven dollar rose after the latest U.S. inflation data heightened investor caution over Federal Reserve rate hikes .

Data on Wednesday showed U.S. consumer prices jumped 9.1% year-on-year in June, from 8.6% in May. Read more

The data was seen as strengthening the case for an aggressive rate hike by the Federal Reserve. Policymakers could consider a 100 basis point increase at the July meeting, Atlanta Federal Reserve Chairman Raphael Bostic said. Read more

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At the start of European trading, money markets were pricing in a 54% chance of a full one percentage point hike at the July meeting and a 46% chance of a 75 basis point hike.

Asian stocks remained stuck at two-year lows and European indices opened in the red. As of 07:35 GMT, the European STOXX 600 and London’s FTSE 100 were both down 0.2% on the day (.STOXX), (.FTSE).

“The Fed probably needs to temper people’s expectations in terms of what they can do,” said Eddie Cheng, head of international multi-asset investments at Allspring Global Investments.

“During the last bull cycle, we observed that inflation continued to rise during the bull cycle… it takes time for monetary policy to affect inflation.”

Cheng said riskier assets would be the “collateral damage” of the Fed’s attempts to rein in inflation.

The dollar index measuring its performance against a basket of currencies rose 0.2 % to 108.43 , while the dollar rose 1.1 % against the yen , the highest since 1998 .

The pound was down 0.2% at $1.1865. In the first vote to choose who will succeed Boris Johnson as leader of the Conservative Party, former finance minister Rishi Sunak won the strongest backing from Tory lawmakers. Read more

The euro fell 0.3% to $1.00325, after slipping below $1 on Wednesday for the first time since 2002.

The euro has been under pressure due to the European Central Bank delaying the Fed in ending its ultra-loose monetary policy of the past decade, as well as economic risks from the euro zone’s reliance on Russian gas. . Read more

The yield on Germany’s benchmark 10-year government bond rose 8 basis points to 1.231%.

Italian yields rose sharply ahead of a parliamentary confidence vote that risks bringing down the country’s government.

The US 10-year rate rose about 7 basis points to 2.9817%. The 2-year, 10-year portion of the Treasury yield curve is at its maximum inverted at any point in this cycle, according to Deutsche Bank. Read more

Yield curve inversion – that is, when short-term interest rates are higher than longer-term rates – is generally seen as an indicator that markets are anticipating a recession.

Oil prices fell as traders saw a sharp rise in US rates eventually reduce demand for crude. Read more

Overnight, the Monetary Authority of Singapore and the Bangko Sentral ng Pilipinas surprised markets by tightening monetary policy in off-cycle moves. Read more

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Reporting by Elizabeth Howcroft Editing by Tomasz Janowski

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