ASX 200 tumbles -1.4% as inflation and yields come back to bite markets

The ASX 200 tumbled -1.4% in early trade, reversing most of last week's short covering inspired comeback.

The sharp reversal follows a rough session on Wall Street, where the S&P 500 fell -2.37% and the Nasdaq down an outsized -3.1%.

Catalysts behind the selloff

US stocks sold off sharply in response to a University of Michigan consumer sentiment survey which showed an unexpected increase in year-ahead and long-term inflation expectations.

"The median expected year-ahead inflation rate rose to 5.1%, with increases reported across age, income, and education," said Joanna Hsu, Survey of Consumers director.

"Last month, long run inflation expectations fell below the narrow 2.9-3.1% range for the first time since July 2021, but since then expectations have returned to that range at 2.9%."

What's the significance of this?

Elevated inflation runs the risk of the Fed hiking not only more but keeping rates higher for longer, which then raises the likelihood of the US economy falling into a recession.

Back at home

Australian cash rate futures have eased in the past few weeks following the RBA's more dovish-than-expected 25 bp rate hike.

Futures previously expected rates to peak around 4.0% in early 2023 with no rate cuts in 2024. Now, the curve expects rates to sit around 2.9% by year end but still peak around that 4.0% level, except much later, in February 2024.

As far as futures are concerned, there's no pivot in sight and rates are expected to remain much higher for longer.

Source: Australian Securities Exchange

Yields to pressure equities

More broadly speaking, factors like accelerating core inflation and strong labour market conditions are pushing bond yields back towards new highs.

Aussie 10 year yields are back to the 4.0% level which has typically pressured share market performance.

Australia Government Bonds 10 Year Yield versus ASX 200 (Source: TradingView)