Wall Street set for second day of losses; U.S. 10-year yield near 2%

[February 11, 2022]  By Elizabeth Howcroft

LONDON (Reuters) - European stock indexes fell on Friday, Wall Street futures were down and the U.S. 10-year yield held close to 2% after red-hot U.S. inflation data that prompted investors to expect tighter monetary policy from the Federal Reserve.

U.S. consumer prices showed the biggest annual increase in 40 years, data released late on Thursday showed.

The news fuelled speculation that the Fed will increase rates by 50 basis points in March, rather than 25. This hurt global stock markets as expectations of monetary policy tightening generally reduces investors' appetite for risk-sensitive assets.

Meanwhile, Russia is now massing yet more troops near Ukraine and an invasion could come at any time, U.S. Secretary of State Antony Blinken said on Friday.

Wall Street stocks fell after the data and the weakness continued through the Asian and European sessions on Friday.

The MSCI world equity index, which tracks shares in 50 countries, was down 0.4% on the day at 1203 GMT.

Europe's STOXX 600 was down 0.9%, with tech stocks leading the sell-off. But it was still on track for its biggest weekly gain since late December.

Nasdaq and S&P 500 futures were down 0.7% and 0.5% respectively.

"Real inflation is not under control," said Matteo Cominetta, senior economist at Barings Investment Institute. "It's a story of overheating, plain and simple."

"You have all these cost-push factors on one side and then you've got booming demand hitting this constrained supply - it's very hard to see how inflation could slow down anytime soon in the U.S."

The U.S. 10-year Treasury yield hit 2% for the first time since August 2019 after the data and stayed around this level, at 2.0084% at 1205 GMT .

A street sign for Wall Street is seen in the financial district in New York, U.S., November 8, 2021. REUTERS/Brendan McDermid/File Photo

The spread between yields of 2-year U.S. Treasury debt and 10-year U.S. Treasury debt fell below 40 bps for the first time since August 2020 as growing expectations of higher U.S. interest rates prompted traders to push short-end yields higher.

European government bond markets were more mixed, with the German 10-year yield down by 3 bps on the day, at 0.265% .

European Central Bank President Christine Lagarde said in an interview that raising rates now would only hurt the economy.

These comments were more dovish than the tone at the ECB meeting last week, when Lagarde surprised markets by opening the door to the first ECB rate hike in more than a decade to curb record-high inflation.

Barings' Cominetta said that, while he expected the Fed to raise rates by 25 or 50 basis points at its next meeting, he does not expect the European Central Bank to raise rates until early 2023.

He added that he expects volatility in fixed income markets in Europe, as investors become more dependent on economic data.

The euro was down 0.3% against the dollar, at $1.13975, set for a 0.5% drop on the week overall.]

Oil prices slipped as the inflation data fanned fears of aggressive rate hikes, then gained after the International Energy Agency (IEA) said oil markets were tight.

(Reporting by Elizabeth Howcroft; Editing by Chizu Nomiyama)

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