Rising inflation expectations drag down US stocks, fueling uncertainty

U.S. stocks closed Tuesday at firmly lower levels while yields on the popular 10-year U.S. Treasury rose, amid rising concerns regarding inflation, lowering anticipations for an interest cut in January.

Institute for Supply Management’s (ISM) monthly survey of the U.S. services sector showed it expanded in December, but the prices component also jumped to its highest point since last January. “A much stronger-than-expected rise in U.S. services prices sent shivers through U.S. stocks,” said market analyst Axel Rudolph at online trading platform IG.

There have been mounting concerns that incoming U.S. President Donald Trump’s plans to raise tariffs, cut taxes and crack down on immigration will reignite U.S. inflation, putting pressure on the Fed to keep borrowing costs higher for longer.

“There are still fears that Trump’s tariff plan will be inflationary for economies around the world,” said Susannah Streeter, head of money and markets at Hargreaves Lansdown brokerage in London. The tariffs “could lead to further upward pressure on the dollar, if interest rates are forced to stay elevated in the U.S., due to higher consumer prices,” she told AFP. “This is having an impact on the bond markets and has led to a sell-off around the world,” she added.

Alongside the rise in U.S. government bond yields, the yield on 30-year U.K. Treasury Gilts also increased, hitting its highest level since 1998. Friday’s U.S. non-farm payroll report is the next big marker for investors hoping for some idea about the Fed’s plans for rates after it recently scaled back its forecasts for cuts in 2025.

Euro rises on inflation data boosting interset cut expectations

The euro strengthened against the dollar as official data showed eurozone inflation accelerated in December to 2.4%. Higher eurozone inflation will make it more difficult for the European Central Bank to cut interest rates in order to boost sluggish growth. The euro later fell back, however, after the U.S. services data, with the dollar rising against its major rivals.

European stock markets closed mostly higher, as did Asian stocks, which still benefitted from speculation that Trump’s tariff plans to slap tariffs on all imports may be scaled back.

The Washington Post said Monday that Trump’s aides were weighing plans to apply tariffs to goods only in certain critical sectors ─a narrower definition than the president-elect previously proposed. Trump, however, described the Post story as “just another example of Fake News.” The report comes after Trump warned last year that he would slap huge levies on China, Canada and Mexico.

Late on Monday, the U.S. Defense Department added the tech giant Tencent and battery manufacturer CATL to a list of companies it says are affiliated with Beijing’s military ─a move China called “unjustified suppression.”

Tencent’s shares plummeted more than 7% in Hong Kong on Tuesday, while CATL stock sank 5.2%.