Eurozone debt markets under pressure after gloomy UK inflation data

Eurozone debt markets came under pressure on Wednesday, after worse than expected UK inflation data triggered a sharp sell-off in the country’s government bonds.

Consumer price index figures for the UK showed a 10.1 per cent year-on-year increase for July, higher than June’s figure of 9.4 per cent and above economists’ consensus forecast of a 9.8 per cent rise.

The figures sparked a rout in short-dated UK debt, which is sensitive to changes in interest rate expectations, with the two-year yield surging 0.24 percentage points to 2.39 per cent. Ten-year gilt yields rose 0.12 percentage points to 2.24 per cent. Bond yields rise when their prices fall.

That selling ricocheted across eurozone bond markets, with the German two-year yield rising 0.12 percentage points to just under 0.7 per cent and Italy’s equivalent yield adding 0.14 percentage points to 1.56 per cent. US debt came under softer pressure, with the two-year yield rising 0.04 percentage points to 3.3 per cent.

The moves in gilts were likely to put pressure on the Bank of England to raise interest rates more aggressively, triggering concerns about the UK’s growth outlook, investors said. “Today’s higher than expected inflation release, combined with the prospect of higher inflation to come in the autumn, accentuates the policy challenge for the Bank of England,” said David Dowsett, global head of investments at GAM Investments.

As growth concerns intensified, equity markets also slipped back. The FTSE 100, which is weighted towards international energy and commodities companies and is up 1.7 per cent this year, lost 0.4 per cent.

“The extent of the income squeeze now facing [UK] households will be difficult to ignore and measures aimed at shielding the most vulnerable are likely,” said Hussain Mehdi, macro and investment strategist at HSBC Asset Management. “However, overall real spending power will remain very constrained and amid a still hawkish Bank of England, recession this year is a base case outcome.”

Europe’s regional Stoxx 600 share index slipped 0.3 per cent and Germany’s Dax index lost 0.9 per cent. In Asia, Japan’s Topix index closed up 1.3 per cent, while Hong Kong’s Hang Seng was up 0.5 per cent.

The UK’s gloomy inflation figures came just a week after US data signalled that the rate of consumer price growth may be steadying in the world’s largest economy.

Wall Street’s broad S&P 500 edged higher on Tuesday, closing up 0.2 per cent, while the technology-heavy Nasdaq Composite dipped 0.2 per cent, after earnings results from retailers including Walmart and Home Depot pointed to consumer strength. Futures contracts tracking the S&P and the Nasdaq 100 were down 0.6 per cent and 0.7 per cent respectively on Wednesday.

Later in the session, investors will scrutinise the minutes of the Federal Reserve’s latest monetary policy meeting for any further clues about the central bank’s strategy for tackling inflation.

Brent crude gained 0.7 per cent on Wednesday to $92.98 a barrel but remained more than 5 per cent lower for the week so far as recession fears continue to weigh on demand expectations.

The pound was largely steady against the dollar and the euro, gaining 0.1 per cent on the greenback to trade at $1.21.