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US stocks were on course for their biggest weekly drop in over two months on Friday, after the latest evidence of stubbornly high inflation in the world’s largest economy unnerved traders.

The S&P 500 fell 1 per cent in morning trade while the Nasdaq 100 was down 1.9 per cent, with both indices deepening their losses from earlier this week. The former is down 3 per cent this week, and the latter 3.5 per cent.

US Treasuries also sold off, with the interest rate-sensitive two-year yield rising 0.1 percentage points to 4.82 per cent, the highest since June 2007. The 10-year Treasury yield climbed 0.08 percentage points to 3.96 per cent.

Core monthly personal consumption expenditure — a measure of prices closely watched by the Federal Reserve — rose 0.6 per cent from December to January, compared with the 0.3 per cent forecast. The year-on-year figure was 4.7 per cent, substantially higher than the 4.3 per cent anticipated.

The figures follow recent strong labour market and consumer price data that had already stoked market expectations the Fed has further work to do in lifting borrowing costs to win its battle against inflation. Friday’s numbers “all but ensure the Fed will continue on its rate hiking campaign for a lot longer than markets anticipated just a few weeks ago”, said Jeffrey Roach, chief economist for LPL Financial.

Markets are now pricing in a rise in the benchmark fed funds rate to between 5.25 per cent and 5.5 per cent by July — more than half a percentage point higher than where investors thought rates would peak at the start of February.

Stocks were also dragged lower in Europe. The region-wide Stoxx 600 fell 1 per cent, while London’s FTSE 100 dropped 0.4 per cent.

Germany’s Dax declined 1.7 per cent and the French CAC 40 was down 1.8 per cent.

Investors are also concerned that the European Central Bank will lift rates further. Joachim Nagel, president of the Bundesbank and a member of the ECB’s governing council, said on Friday that inflation was likely to “remain at very high levels”, requiring “significant interest rate hikes beyond March”.

Earlier in Asia, the Hang Seng index fell 1.7 per cent, while China’s CSI 300 lost 1 per cent. Although ecommerce group Alibaba beat analysts’ expectations with its fourth-quarter earnings, its shares fell 5.4 per cent, suggesting investor skittishness over China’s economy despite the government easing Covid-19 restrictions.

The euro was down 0.5 per cent while the dollar index, which measures the greenback against a basket of six peer currencies, was up 0.5 per cent.

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