Stock markets down, dollar and pound rise as inflation surges

Equity markets turned lower Wednesday while the dollar and pound strengthened as inflation concerns continued to fan expectations that central banks will be forced to tighten monetary policy quicker than expected.

New York’s three main indexes rose again after data showed a forecast-busting rise in retail sales as well as solid earnings from shopping giants Walmart and Home Depot.

The news reinforced optimism about the recovery in the world’s top economy and showed consumers were brushing off the effects of surging inflation, for now.

However, it also provided more support to calls for the Federal Reserve to act sooner to prevent overheating and make sure prices do not run out of control.

Top Fed official James Bullard said the bank should take a “more hawkish” shift and that the tapering of its vast bond-buying programme -- which has helped support an extended global equity rally -- “could move faster”.

But San Francisco Fed chief Mary Daly remained on the more doveish side, believing -- like Fed boss Jerome Powell -- that price pressures were temporary and suggesting acting too soon could hurt the economic rebound.

Expectations for tighter US monetary policy have pushed the dollar to touch a four-year high of 114.97 yen, with the Japanese unit also weighed by a pledge by the country’s central bank to maintain its ultra-loose measures for some time.

Pressure also built on the Bank of England to act and the pound jumped against the dollar and euro after data Wednesday showed United Kingdom inflation hit a decade high last month.

The data “now makes it odds-on that all the pre-Christmas headlines will be of the Bank of England steals Christmas variety, if they do bite the bullet and belatedly nudge rates higher,” said Michael Hewson of CMC Markets.

London’s FTSE opened lower.

In Asia, Hong Kong retreated for the first time after a six-day run-up, while Tokyo, Sydney, Seoul, Singapore, Mumbai, Manila and Wellington were also in negative territory.

However, Shanghai and Taipei reversed early losses while there were mild gains in Bangkok and Jakarta. Paris and Frankfurt were flat in initial trade.

Analysts remain guardedly upbeat about the outlook for equities.

“All signs are pointing to a very strong holiday season for retailers and that should help keep sending stocks higher,” said OANDA’s Edward Moya.

He added that markets were “fixated on inflation”, with an expectation that things can get “a little uglier over the next couple of months, before traders get unnerved”.

Oil prices extended losses as investors wait to see if President Joe Biden heeds calls to tap the United States’ giant reserves to meet surging demand.

And a report in Hong Kong’s South China Morning Post said the president had asked Chinese counterpart Xi Jinping in their virtual summit to join him in releasing extra crude into the market.