"The evolution of the inflation outlook remains critical for forecasting the path of US interest rates in the near term," said Ian Lyngen, strategist at BMO Capital Markets

Markets Whipsaw as Bonds and Stocks move in Opposite Directions .

Stock futures sank and bond yields jumped as a higher-than-expected inflation report fueled anticipation that the Federal Reserve will continue to tighten policy.

S&P 500 contracts fell after a report showed that producer prices climbed more than expected, thanks mostly to strength in certain service categories. In early trading, Nasdaq 100 contracts underperformed due to losses in titans like as Tesla Inc. and Nvidia Corp. The two-year US yield, which is more vulnerable to upcoming policy changes, reversed its slide and is now hovering at 4.85%. The value of the dollar fluctuated.

"The evolution of the inflation outlook remains critical for forecasting the path of US interest rates in the near term," said Ian Lyngen, strategist at BMO Capital Markets. "From here, the final major event will be the August survey results from the University of Michigan." This is the first look investors will have at August's data, and the most important component inside the details will be the 5-year inflation outlook."

The University of Michigan's consumer-sentiment index is projected to decline in early August as rising petrol prices influence inflation predictions.

Pursuing Higher Yields

According to Bank of America Corp. strategists led by Michael Hartnett, treasuries are on track for a record year of inflows as investors seeking some of the highest rates in months flood into cash and bonds.

In the week ending August 9, cash funds attracted $20.5 billion, while investors put $6.9 billion into bonds, according to a note based on EPFR Global data. Meanwhile, the US stock market experienced its first outflow in three weeks, amounting to $1.6 billion.

Early this month, a major market indicator known as the "most important number in finance" fell to its lowest level since 2004, alarmed investors that it was delivering a gloomy warning. However, history shows that despite the huge move, the generally foreboding sign is really pointing to additional gains.

The equity risk premium is calculated as the difference between the S&P 500's earnings yield and the current yield on 10-year Treasury notes. The bigger the risk premium, the more appealing stocks are in comparison to bonds. This metric, which has been falling sharply for the most of the year, has just dropped to its lowest level in about 20 years, showing that equities are becoming considerably overvalued in comparison to bonds.

Elsewhere, the pound gained alongside UK bond yields on data indicating the British economy recorded its best quarterly growth in more than a year, an unexpected display of resilience that will keep pressure on the Bank of England to hike rates further.