Global stocks have fallen while the dollar and Treasury yields stayed strong, as traders pared back expectations for the pace and scale of rate cuts by the Federal Reserve this year.

The latest shift in rate expectations came after an upside surprise in US inflation on Tuesday that showed the consumer price index (CPI) rose 3.1 per cent on an annual basis, above forecasts for a 2.9 per cent increase.

The data has prompted traders to slash their bets on where US rates will go this year. Futures now point to about 90 basis points worth of cuts from the Fed by December, roughly four quarter-point drops, compared to 110 bps prior to the data release and 160 bps at the end of 2023.

With the prospect of a steep drop in interest rates ebbing, investors kept the pressure on global stocks, which had rallied strongly towards the end of last year on aggressive bets for rate cuts by major central banks globally in 2024.

The MSCI All-World index, which hit two-year highs on Monday, was down 0.1 per cent on Wednesday, following a drop on Wall Street overnight that pulled the S&P 500 back below 5,000 points. US futures  were up 0.2-0.3 per cent.

Worryingly for investors, the CPI report showed an unexpected pickup in stickier elements, such as service-sector inflation and shelter, which helped drive the overall increase.

“When you get a jump like this, and the year-on-year figures really show this rather than the monthly ones, that’s a shock because it just shows that it’s not all plain sailing and we may get more increases in inflation,” Trade Nation senior market analyst David Morrison said.

“We should be surprised by the jump in inflation, because I don’t think anyone was thinking about that. It was more how slowly do we get down towards two per cent and this is like kicking the ladder away a bit,” he said.

In Europe, the STOXX edged up 0.1 per cent, as a flurry of stronger earnings boosted the regional index.

Even Japan’s Nikkei, which hit its highest in 34 years on Tuesday, was not spared from the beating and fell 0.7 per cent.

The recent rally in the Nikkei has been greased by a sliding yen, which weakened past the key 150 per dollar level for the first time this year on Tuesday.

The yen last stood at 150.50 per dollar. The 150 level has been seen in the past as a potential catalyst for intervention by Japanese monetary authorities. It was just past this level that they intervened to shore up the yen in late 2022.

“If they do try intervention, I think it’ll be near … the (dollar/yen) high from October 2022 and the high we saw in mid-November,” said Tony Sycamore, a market analyst at IG.

Japan’s top currency officials warned on Wednesday against what they described as rapid and speculative yen moves overnight.

Yields on 10-year US Treasuries struck their highest in over two months following Tuesday’s inflation report, which gave the dollar a burst of strength.

By Wednesday, the benchmark 10-year yield was down 2.5 bps at 4.2907 per cent, below a session peak of 4.332 per cent.

With yields holding firm, the dollar clawed into positive territory against a basket of currencies to 104.90, having hit its highest since November on Tuesday.

“The attendant, broad-based US dollar surge admittedly reflects (the) corresponding surge in US Treasury yields,” said Vishnu Varathan, chief economist for Asia ex-Japan at Mizuho Bank.

Sterling fell 0.3 per cent to $1.2552, after UK data showed inflation did not pick up as expected last month.

In cryptocurrencies, bitcoin hovered around the $50,000 level, while ether rose 1.8 per cent to 2,681.

Oil prices were flat, paring some of Tuesday’s gains as geopolitical tensions lingered in the Middle East and eastern Europe.

US crude traded at $77.85, while Brent futures were steady at $82.77.

Gold, meanwhile, fell 0.2 per cent to $1,989 an ounce.

This post was originally published on Michael West.