US stocks turned higher on Wednesday, snapping three straight days of declines fuelled by hawkish messaging from the US Federal Reserve and concerns over aggressive interest rate rises.
The broad S&P 500 gauge added 0.7 per cent in early dealings, while the technology-heavy Nasdaq Composite rose 1.1 per cent. Both indices had closed the previous session down 1.1 per cent, extending falls after central bankers redoubled their commitment at last week’s Jackson Hole conference to tackling inflation, even in the face of stuttering economic growth.
Several European Central Bank governing committee members have since spoken about the need to continue tightening monetary policy. In a speech in Austria on Tuesday, Bundesbank president Joachim Nagel rejected calls to slow rate rises to protect economic growth.
Those moves came on the last day of the month, a time when the rebalancing of portfolios can contribute to volatility.
European shares edged lower on Wednesday, with the regional Stoxx 600 gauge down 0.1 per cent in the wake of worse than expected inflation data for August. Figures published earlier in the session showed that eurozone consumer price growth hit a record 9.1 per cent this month, higher than economists’ expectations of 9 per cent. July’s reading came in at 8.9 per cent.
That data propelled German and UK government bond yields even higher as investors continued to search for clues about how far and fast the ECB and the Bank of England would raise borrowing costs to tame inflation, which has been stoked by an escalating energy crisis.
Both debt markets were on track to close out one of their worst ever months. The 10-year German Bund yield, seen as a proxy for borrowing costs across the eurozone, has climbed more than 0.7 percentage points in August to trade at 1.56 per cent — reflecting its biggest monthly surge since 1990. The two-year Bund yield, which closely tracks interest rate expectations, has posted its biggest jump in more than four decades — rising 0.05 percentage points on Wednesday to 1.2 per cent.
In the UK, short-dated gilt yields have added more than 1.3 percentage points in August, their steepest ascent since 1994 — jumping 0.12 percentage points on Wednesday to 3.02 per cent. Bond yields rise as their prices fall.
“The further increases in headline and core inflation in August, and [the] likelihood that they will keep rising, will add to the pressure on the ECB to step up the pace of tightening. The balance of probabilities is shifting towards a 75bp hike next week,” wrote Jack Allen-Reynolds, senior European economist at Capital Economics, after the data release.
The ECB raised borrowing costs in July for the first time in more than a decade by an unexpectedly large 0.5 percentage points to zero.
Some economists have warned that eurozone inflation will move above 10 per cent in the autumn and stay higher for longer owing to surging gas prices. Contracts linked to TTF, Europe’s wholesale gas price, were down 10 per cent at €239 a megawatt hour on Wednesday after reaching a high point of more than €340 a megawatt hour earlier this month.
Russia on Wednesday halted gas flows to Europe via the critical Nord Stream 1 pipeline as Gazprom started three days of planned maintenance on the line.
US government debt was relatively steady on Wednesday, with the 10-year benchmark Treasury yield up 0.02 percentage points at 3.13 per cent. Investors will scrutinise jobs data due out on Friday.
Evidence of a hotter labour market in the world’s largest economy may spur the Fed to maintain its aggressive stance on monetary policy, while signs of cooling may prompt debate about the justification for raising rates into a recession. Economists are expecting US employers to have added 300,000 new jobs in August, down from 528,000 last month.