MACRO: US inflation spikes, tech stocks tumble

• US inflation data for April surprised markets

• Fed’s Clarida surprised by strong CPI report

• Tech stocks under pressure, US Treasury yields surge

Today’s inflation data from the United States was much awaited by investors around the world. This should not come as a surprise as inflation have recently become a major theme that moves the markets. While economists and analysts were predicting that US inflation figures for the month of April would accelerate, the report still caught markets by surprise as inflation print came in well above expectations. The headline CPI inflation rose 4.2% YoY and 0.8% MoM (vs exp. 3.6% and 0.2% respectively). At the same time, core CPI inflation advanced as much as 3.0% YoY and 0.9% MoM (vs exp. 2.3% and 0.3% respectively). A rapid increase of the core inflation was particularly shocking - it spiked at fasted pace since 1981 on month-over-month basis. 

US core inflation soared 3.0% YoY in April - well above markets' expectations. On month-over-month basis, US core inflation spiked at fastest pace since… 1981! Source: Bloomberg

What does that mean for the markets? For of all, the Federal Reserve is once again under enormous pressure and Fed speakers are certainly going to struggle during their upcoming interviews. The US central bank wants to convince the markets that inflation would remain “transitory” - in such scenario the Fed could avoid the discussion about potential tapering. In fact, the Fed’s Clarida expressed his surprise shortly after today’s release. On top of that he said that policy makers “would not hesitate to act and use our tools to bring inflation back down to our two per cent longer run goal,” should the issues become “excessive and persistent”. 

This makes markets worried about future monetary conditions. Following today’s data, US money markets are now pricing in 100% probability of a 25 bps rate hike by end-2022. US 10-year yield jumped to 1.686%, the highest level since mid-April. With rising US yields, equity markets struggle again and the sell-off on Wall Street intensifies. Nasdaq is currently tumbling roughly 2% as tech stocks are the ones that are the most sensible to any potential changes in monetary conditions. For this reason stocks from the technology sector are often referred to as long duration assets. 

UST 10y yield jumped after strong CPI report. Any rapid increase of US yields should be seen as a threat to long duration assets, including tech stocks. Source: Bloomberg (via ZeroHedge).