FTSE and Wall Street slump after US inflation hits new 40-year high

·3 min read
The FTSE and Wall Street stocks were trading in the red on Friday as inflation and growth fears grip markets. Photo: Timothy A. Clary/AFP via Getty
The FTSE and Wall Street stocks were trading in the red on Friday as inflation and growth fears grip markets. Photo: Timothy A. Clary/AFP via Getty

European and Wall Street stocks sank in a sea of red on Friday as investors digest the latest inflation reading from the US and the European Central Bank’s policy meeting.

The FTSE 100 (^FTSE) fell to a three-week low, falling 2.1%, while France’s CAC (^FCHI) slumped 2.7% and the DAX (^GDAXI) dived 3.1% in Frankfurt.

It comes after US inflation hit a new 40-year high, driven higher by food and energy prices in a worrying sign that price rises have further to run.

Last month's increase was the second highest monthly surge since March when the Ukraine war broke out.

The consumer price index (CPI) rose to 8.6% in May, beating economists' forecasts of 8.3%, while core inflation, which strips out volatile components, slowed on an annual basis from 6.2% to 6%.

The numbers come ahead of the Federal Reserve's and Bank of England interest rates meetings next week.

Read more: Brexit cost UK economy billions in lost trade and investment

On Thursday, the ECB confirmed its intention to lift interest rates by 25 basis points in July, with a further raise expected in September, which will be determined by the medium-term inflation outlook.

The central bank also significantly hiked its inflation forecasts for the eurozone and downgraded its growth outlook.

"Risk assets are back in 'sell the news' mode it seems, as a sea of red engulfs stock markets on the final day of the week," said Chris Beauchamp, chief market analyst at online trading platform IG.

"Stocks, and investors, are very jumpy about inflation once again. This was the case before today’s US CPI figure, thanks in no small part to the ECB, but this afternoon has really set the cat amongst the pigeons."

Across the Atlantic, US benchmarks extended losses on Friday after posting their biggest declines in more than three weeks in the previous session.

Wall Street’s S&P 500 (^GSPC) lost 112.66 points, or 2.8%, to 3905.16. The tech-heavy Nasdaq (^IXIC) crashed 3.5%, while the Dow Jones (^DJI) declined 2.4% at London's close.

Michael Hewson, chief market analyst at CMC Markets, said: "With the Federal Reserve also set to raise rates by 50bps next week, and at the next two meetings, there has been a significant shift in thinking when it comes to how quickly inflation is expected to return to target, with all the consequences that might have for any sort of economic growth this year.

"The OECD didn’t help the mood this week with a gloomy assessment of the global economic outlook with a particular pessimistic focus on Europe and the UK."

Read more: UK on brink of recession, OECD warns

Sterling (GBPUSD=X) lost ground against the dollar as attention turns to surging inflation and potential interest rate rises. The pound dipped 1.4% to $1,232, it was up 0.5% to 85p against the euro (EURGBP=X).

Asian stocks were mixed overnight with the Nikkei (^N225) down 1.5% in Japan, while the Hang Seng (^HSI) edged 0.4% lower in Hong Kong and the Shanghai Composite (000001.SS) gained 1.4%.

It came as producer price inflation in China rose at the slowest pace in fourteen months at 6.4% year-on-year from 8% in April.

Meanwhile, the Russian central bank announced it will slash interest rates from 11% to 9.5%, the pre-war level, adding that it would "consider the necessity of reducing the key rate at its upcoming meetings".

Watch: How does inflation affect interest rates?