US 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 0.3 per cent by mid-afternoon in New York, having clawed back declines from earlier in the day as investors appeared to take a dovish interpretation of the minutes from the Federal Reserve’s latest policy meeting. The technology-heavy Nasdaq Composite gauge was down 0.7 per cent.

Target’s shares slid as much as 5 per cent after the US retailer missed earnings expectations for the three months to July 30 and 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 company’s shares later pared some losses.

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. Yields backed off of those highs late in the session.

That selling ricocheted across other countries’ debt markets, with the yield on the 10-year US Treasury note, a proxy for borrowing costs worldwide, rising 0.08 percentage points to 2.89 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.”

The moves in both stocks and bonds eased after the release of the minutes from the Federal Reserve’s latest policy meeting in July at which the central bank raised interest rates by 0.75 percentage points.

The market reaction suggested investors viewed the minutes as dovish despite the fact that they showed that Fed officials had discussed the need to keep interest rates at levels that restrict the US economy “for some time” in a bid to contain the highest inflation in roughly 40 years.

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.