Irish shares join in sell-off amid new fears of interest rate hikes

The rise in the US consumer price index, up 0.1% from July, is stoking fears of further Fed and ECB rate increases

A shock US inflation report has sparked fears for a new round of interest rate hikes in the US and Europe, leading to a selloff for shares. 

Irish shares yesterday joined in the selloff of US and European stock markets after the US reported that core inflation there had spiked higher in August.

The unexpectedly high reading has reignited fears that the US Federal Reserve and the European Central Bank will sanction further outsized interest rate increases.

Only last week the ECB hiked its key rates by 75 basis points, or three quarters of a point, in an aggressive move designed to stop inflation pressures becoming embedded in the eurozone.

The rate hike helped boost the value of the euro against the dollar and sterling but put up the cost of tracker mortgages. However, stock market investors “fled for the exits again” yesterday after the US inflation report, said online trader IG chief market analyst Chris Beauchamp which has put large US rate hikes back on the agenda.

“The market is back to selling equities and buying the dollar,” Mr Beauchamp said in a commentary.

In Ireland, shares fell in most major companies, with building materials firms Kingspan sliding 5.75% and CRH ending 2.4% down at the close.

Housebuilders Cairn Homes and Glenveagh Properties fell by 7% and 1%.

In Britain, shares in grocery delivery firm Ocado fell after warning about a weakening of spending by consumers. Retailers Tesco, JD Sports and Next also fell.

Traders are now betting the US Federal Reserve will lift its benchmark rate by at least three-quarters of a point next week, with some chatter that the increase might need to be even bigger than that after consumer-price inflation data came in hotter than expected.

The implied cost of borrowing for most governments in Europe rose in the wake of US inflation report.

The yield on the 10-year bond for the UK rose to 3.17%, for Germany to 1.72%, and to 4% for Italy.

The yield on the Irish 10-year bond rose to 2.3%.

US investors are also driving up expectations for just how high they reckon the US central bank might ultimately push policy rates early in 2023, towards about 4.3%.

It appears, however, that concern is mounting about whether that could also crimp economic activity in a way that forces them to re-ease policy before 2023 is out.

The US consumer price index increased 0.1% from July, after no change in the prior month, the new data showed. From a year earlier, prices climbed 8.3%, a slight deceleration, largely due to recent declines in petrol prices.

So-called core consumer prices, which strips out the more volatile food and energy components, advanced 0.6% from July and 6.3% from a year ago. All measures came in above forecasts.

“There is no question that the market is wrong- footed here,” said AmeriVet Securities head of US rates trading and strategy Gregory Faranello.

“It keeps the heat on the Fed and the market,” he said.

• Additional reporting Bloomberg