The Dow Jones dropped 0.6% upon opening after US inflation figures came in higher than expected in January, rising 0.5% month on month, leading to concerns interest rates could rise faster than expected.
The US Bureau of Labor Statistics announced the Consumer Price Index increased 0.5% in January on a seasonally-adjusted basis, while over the last 12 months, the index was unchanged reporting a rise of 2.1%.
This was surprise compared to consensus estimates that expected a rise of 1.9%.
Following the data release, the Dow Jones fell 0.6% and the S&P 500 initially dropped but by around 3.11pm GMT had rebounded.
The yield on 10-year Treasuries rose 4 basis points after the inflation numbers were released to near a four-year high of 2.88%, while the dollar index jumped as much as 0.5%.
Today's release was eagerly anticipated following the sharp market sell-off last week.
The higher-than-expected inflation figures mean expectations of three rate rises from the Federal Reserve this year have been raised, with the first predicted to happen as early as March.
Luke Bartholomew, investment strategist at Aberdeen Standard Investments, said: "There is a risk that this could pour fuel on the fire of last week's market sell off. That boiled down to real sensitivity to the prospect of higher inflation that markets had anticipated. That nervousness is not going away.
"With unemployment so low, growth going to get big boost from tax cuts and the newly announced spending increases, the stars are aligned for inflation to pick up more from here. So this could set off another round of selling as some investors fret about what it means for US interest rates."
Mitul Patel, head of interest rates at Janus Henderson Investors, said: "Although this print was higher than expected, risks remain in both directions for the coming year. The recently announced fiscal stimulus package comes at a time where the labour market is already very tight, which coupled with a weaker dollar, could lead to higher levels of inflation in the future.
"On the other hand, should recent oil price declines extend further and money supply remain weak, inflation may move lower. The housing market is also likely to exert some downwards pressure on inflation, whilst structural economics, demographic and technological forces that have weighed on inflation lower over recent years, are likely to continue."
Richard Carter, head of fixed interest research at Quilter Cheviot, said: "After the recent bout of volatility, investors were hoping for a benign US inflation report today to allay some of the fears about rising interest rates and more hawkish central banks. Unfortunately this was not to be the case.
"While some of the jump was due to clothing prices, the strength was broad-based enough to justify further interest rate hikes from the Federal Reserve. We would expect this number to lead to more short-term turbulence as markets continue to fret about a regime shift taking place."
At T.Rowe Price, we believe that while a broadening global economic recovery should continue to support markets into 2018, high asset valuations leave little cushion against unexpected market events. In this environment, bonds offer a counterweight to...
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