Yields Jump, Stocks Waver as Inflation Fears Mount: Markets Wrap

Oil climbs after EU leaders back push to ban some Russian oil
German inflation hits record; Fed’s Waller backs 50 bps hikes

Stocks in Asia fluctuated and Treasuries sold off across the curve as oil jumped, adding to worries about how aggressive central banks will need to be to rein in inflation without derailing growth.

Technology stocks underpinned gains in Hong Kong, while China rose as data showed factory activity shrinking at a slower pace and a Shanghai Covid lockdown eased. Equities in Japan were little changed. US contracts edged up, while European futures dipped.

Treasury yields jumped more than 10 basis points after German bunds and European bonds sold off. German inflation hit an all-time high, adding to pressure on central bank policy makers to tame rising prices. The dollar advanced.

Crude oil rose to around $118 a barrel after the European Union agreed to pursue a partial ban on Russian oil in response to the invasion of Ukraine. Higher energy and food costs are keeping upward pressure on prices globally and squeezing consumers.

Global stocks are on track to end the month with modest gains amid skepticism about whether the market is near a trough and as volatility stays elevated. Fears that central bank rate hikes will induce a recession, stubbornly high inflation and uncertainty around how China will boost its flailing economy are keeping investors watchful.

“The mood is temporarily better in markets,” Chris Iggo, chief investment officer for core investments at AXA Investment Managers, said in a note. “I think the worst is over for bond markets but picking the bottom in equities is trickier. Iggo said another 10%-15% drop in equity markets couldn’t be ruled out.

Inflation prints in Europe came before a crucial European Central Bank meeting where officials are set to announce the conclusion of large-scale asset purchases and confirm plans to raise interest rates in July for the first time in more than a decade.

In the US, Federal Reserve Governor Christopher Waller said he wants to keep raising interest rates in half-percentage point steps until inflation is easing back toward the central bank’s goal.

Meanwhile, President Joe Biden will hold a rare Oval office meeting on Tuesday with Fed Chair Jerome Powell amid the highest inflation in decades and ahead of US payroll numbers later this week.

“This time, the Fed’s tightening cycle will be longer, and policy rates and bond yields will have to go higher than markets currently expect,” Franklin Templeton Fixed Income Chief Investment Officer Sonal Desai said in a note. “The corresponding risk to asset prices and economic growth is greater than many like to admit.”

Elsewhere, Bitcoin was back above $31,000 as investors and strategists said the digital currency is showing signs of bottoming out.

Here are some key events to watch this week:

Euro zone CPI Tuesday
The Federal Reserve is set to start shrinking its $8.9 trillion balance sheet Wednesday
The Fed releases its Beige Book report on regional economic conditions Wednesday
New York Fed President John Williams, St. Louis Fed President James Bullard speak at separate events Wednesday
OPEC+ virtual meeting Wednesday
Cleveland Fed President Loretta Mester discusses the economic outlook Thursday
US May employment report Friday
The UN’s Food and Agriculture Organization releases its monthly food price index at a time of maximum concern about global supplies on Friday