Passersby wearing protective face masks walk past a stock quotation board, amid the coronavirus disease (COVID-19) pandemic, in Tokyo, Japan January 25, 2022.
Passersby wearing protective face masks walk past a stock quotation board, amid the coronavirus disease (COVID-19) pandemic, in Tokyo, Japan January 25, 2022. Reuters / ISSEI KATO

European stock indexes fell on Friday and the U.S. 10-year yield held close to 2% after red-hot U.S. inflation data that prompted investors to expect tighter monetary policy from the Federal Reserve.

U.S. consumer prices showed the biggest annual increase in 40 years, data released late on Thursday showed.

The news fuelled speculation that the Fed will increase rates by 50 basis points in March, rather than 25. This hurt global stock markets as expectations of monetary policy tightening generally reduces investors' appetite for risk-sensitive assets.

Wall Street stocks fell after the data and the weakness continued through the Asian session. The MSCI world equity index, which tracks shares in 50 countries, was down 0.4% on the day at 0850 GMT.

Europe's STOXX 600 was down 1%, with tech stocks leading the sell-off. But it was still on track for its biggest weekly gain since late December.

"Real inflation is not under control," said Matteo Cominetta, senior economist at Barings Investment Institute. "It's a story of overheating, plain and simple."

"You have all these cost-push factors on one side and then you've got booming demand hitting this constrained supply - it's very hard to see how inflation could slow down anytime soon in the U.S."

The U.S. 10-year Treasury yield hit 2% for the first time since August 2019 after the data and remained above this level during the Asian session.

At 0902 GMT, it slipped to 1.997%.

European government bond markets were more mixed, with the German 10-year yield down by 2 bps on the day, at 0.263%.

European Central Bank President Christine Lagarde said in an interview that raising rates now would only hurt the economy.

These comments were more dovish than the tone at the ECB meeting last week, when Lagarde surprised markets by opening the door to the first ECB rate hike in more than a decade to curb record-high inflation.

Barings' Cominetta said that, while he expected the Fed to raise rates by 25 or 50 basis points at its next meeting, he does not expect the European Central Bank to raise rates until early 2023.

He added that he expects volatility in fixed income markets in Europe, as investors become more dependent on economic data.

The euro was down 0.3% against the dollar, at $1.1391, set for a 0.5% drop on the week overall.]

The U.S. dollar index was up around 0.1%.

The British pound was little changed against the dollar. UK GDP data showed that Britain's economy shrank by less than feared in December.

Oil prices slipped as the inflation data fanned fears of aggressive rate hikes, and gold also edged lower.