Jun 13, 2022 05:22AM ET
By: AnalysisiWatch
World stock markets fell to new 2022 lows on Monday and the Japanese yen slumped to levels not seen in nearly a quarter of a century as surging inflation in the U.S. stoked fears of even more aggressive policy tightening in a key week for central bankers.
Friday's much higher-than-expected U.S. consumer price index data was hard for investors to digest, and they sold off both bonds and stocks, dispelling expectations that policy makers would gradually gain the upper hand in reining in price increases.
With no sign of inflation easing and new mass COVID-19 tests in China raising fears of further crippling shutdowns and squeezed global supply chains, investors reduced exposure to risk assets.
The global equity index is down 0.7%, just short of a new low for 2022, with European equity indices deep in the red and benchmark stocks down nearly 2% in early trading, while U.S. equity futures are off to a lower start.
US short-term bond yields have risen to their highest level since late 2007, while the yield curve, as measured by the difference between 10- and 2-year US Treasury yields, has climbed above the zero bound - a level traditionally seen as a harbinger of recession.
European bonds were also caught up in the broader bond market sell-off following last week's hawkish European Central Bank meeting, with 2-year German bund yields rising above 1% for the first time in more than a decade.
Money markets expect the US Federal Reserve to raise interest rates by a total of 250 basis points by the end of the year, with only five meetings left, with some investment banks considering a 75 basis point hike at this week's meeting.
Expectations of even more aggressive rate hikes by the world's central banks have prompted investors to raise bearish bets on global growth. This week is an important one for central banks as the Fed, the Bank of England and the Swiss National Bank meet.
The dollar climbed to 135.22 yen, its highest level since October 1998, helped by a surge in Treasury yields that continued during Tokyo trading, while sterling slumped more than half a percent after the British economy unexpectedly contracted in April.