Yahoo Finance European stocks fall as US inflation climbs to highest rate since 1981
European stocks closed in the red as US inflation soared to levels unseen since Ronald Reagan became president in 1981, exacerbated by the Ukraine war and higher prices.
The FTSE 100 (^FTSE) tumbled 0.7% after the latest snapshot of the UK economy revealed real wages are lagging behind soaring inflation as living standards suffer the biggest drop since 2013.
France’s CAC (^FCHI) was 0.5% lower and the DAX (^GDAXI) lost 0.6% in Germany.
UK average earnings minus bonuses rose 4.1% versus 2021, but dropped 1.3% when adjusted for inflation, the sharpest fall since 2013, according to the Office for National Statistics. Jobs growth may be slowing as employers added 35,000 to payrolls in March, below forecasts and the lowest number since February 2021.
Analysts have warned that the latest jobs data and the slow growth of the UK economy in February could risk stagflation.
"Economic growth forecasts for this year have been downgraded, but remain relatively robust, seeing as economic activity is still recovering from the pandemic," said Laith Khalaf, head of investment analysis at AJ Bell.
"It’s 2023 which is causing real concern though, as the effects of inflation, tax increases and interest rate hikes conspire to put the brakes on economic growth.
"Just how slow the economy goes, no one knows, but the risk of stagflation is clearly there, no matter how rosy things look in the labour market right now."
Read more: UK workers suffer sharpest fall in living standards since 2013 as real pay falls
Across the Atlantic, US benchmarks rebounded as investors gauge the Federal Reserve’s plans to raise hikes by 50bps next month to tame 40-year high inflation.
Prices in the country jumped to 8.5% over the year to the end of March as the Ukraine crisis drove up gas prices. The latest consumer price index (CPI), which measures the prices of a basket of goods and services, increased 0.3% last month, below consensus of 0.5%. Core inflation stood at 6.5% after stripping out volatile food and energy costs, the Bureau of Labor Statistics said.
Wall Street’s S&P 500 (^GSPC) advanced 42.42 points, or 1%, to 4494.95. The tech-heavy Nasdaq (^IXIC) surged 1.4%, while the Dow Jones (^DJI) gained 0.8% at London's close.
The inflation data reversed a selloff in the government bond market after the yield on the benchmark 10-year note fell to 2.71%, having risen to 2.77% earlier for the first time since 2018.
"Today’s bounce is just a staunching of recent losses, and we have yet to see the kind of follow-on price action to support the suggestion that a recovery is at hand," said Chris Beauchamp, chief market analyst at IG.
Asian stocks were mixed overnight with MSCI’s broadest index of Asia-Pacific (AAXJ) shares excluding Japan down 1.8%, while the Nikkei (^N225) tumbled 1.8% in Japan. The Hang Seng (^HSI) edged 1% higher in Hong Kong.
The Shanghai Composite (000001.SS) gained 1.4% as the city eased some COVID rules amid financial and economic pressures. Shanghai is a key financial and manufacturing hub, with disruptions in supply chains intensifying since the 25 million residents were put under strict lockdown in March.
Read more: Ukraine's economy almost to be cut in half, says World Bank
Oil prices recouped losses on Tuesday after Shanghai relaxed some COVID restrictions and the OPEC warned it would be impossible to increase output enough to offset lost Russian supply.
Brent crude (BZ=F) rose 5.8% to $104.08 a barrel. US light crude (CL=F) was 5.7% higher to $99.65 in electronic trading on the New York Mercantile Exchange at the time of writing.
Gold (GC=F), an asset that investors perceive as a safe haven, hit a one month high, buoyed by inflation fears. Spot gold was trading 1.1% higher to $1,970 a troy ounce.
