Global stocks weighed down by inflation jitters

Global shares slipped on Friday after stronger-than-expected U.S. inflation figures and upcoming consumer price data from Europe kept markets on edge about central banks keeping interest rates higher for longer.

MSCI’s broadest index of global equities fell 0.3%, while Europe’s Stoxx 600 share index nudged 0.2% lower in early trade, following a bruising session in Asia.

Data on Thursday showed an increase in U.S. consumer prices in September including a surprise surge in rental costs, an indicator closely watched by economists for signs above-target inflation has become embedded in the economy.

“The hawks calling for at least another (Fed) hike will be supported based on these numbers,” said Ryan Brandham, head of global capital markets, North America, at Validus Risk Management.

Futures markets reflected about a 40% probability of a U.S. rate hike in December, compared with about a 28% chance seen before Thursday’s consumer prices report.

Inflation reports from Sweden, Spain and France are due later on Friday.

The U.S. inflation report along with poor demand for an auction of U.S. 30-year bonds sent Treasury yields higher on Thursday.

In early European trading on Friday, the yield on 10-year Treasury notes was down 3.9 basis points at 4.670% but remained far off the two-week low of 4.5300% it touched at one point on Thursday. [US/]

Recent gains in stocks and a slide in Treasury yields had followed comments from Federal Reserve officials suggesting that U.S. interest rates – which tend to drive global borrowing costs – may have finally peaked.

“Much of the ‘good’ work done in the past week in the form of bull flattening of the U.S. yield curve has been undone by the latest U.S. CPI report,” said Ray Attrill, head of FX strategy at National Australia Bank.

In Asia, where markets are caught between worries of higher dollar borrowing costs and a slowdown in China’s economy, MSCI’s index of equities outside Japan fell 1.2% as it remained in negative territory for the year-to-date.

Data on Friday showed China’s consumer prices were flat in September, while factory-gate prices shrank at a slower pace, indicating deflationary pressures persist. Japan’s Nikkei was 0.53% lower.

The week’s sharp escalation of Middle East tensions also ensured the mood remains cautious across markets.

In a speech in Beijing on Friday, European Union foreign policy chief Josep Borrell called for Europe, China and the United States to work together to resolve the conflict. Israel’s foreign ministry also announced it was “deeply disappointed” China had not yet condemned last weekend’s attacks by Hamas.

The risk-off mood also prevailed in the currency market, with the dollar holding on to most overnight gains. Against a basket of currencies, the dollar eased 0.07% to 106.40, having gained 0.8% overnight.

The euro climbed 0.12% to $1.054, while sterling was at $1.21, also up 0.12%. The dollar’s ascent has again put the Japanese yen under pressure, with the yen at 149.75 per dollar, close to levels where the Bank of Japan has previously intervened to strengthen the currency.

Gold prices edged up on Friday but remained below two-week highs hit in the previous session. Spot gold added 0.4% to $1,876.6 an ounce. [GOL/]

Oil prices rose on Friday after the U.S. tightened its sanctions programme against Russian crude exports, raising supply concerns in an already tight market. U.S. crude advanced 1.3%% to $83.70 per barrel and Brent was at $86.93, up 1.1% on the day. [O/R]

Brent looked set for a weekly gain as investors keep a wary eye on the potential for disruptions to Middle Eastern exports due to the Gaza crisis, but it remains 8.7% down for the month.