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Global stock and bond markets fell on Wednesday as investors reduced expectations for quick interest rate cuts in the euro zone, the United Kingdom and the United States.
The global sell-off came after European Central Bank President Christine Lagarde indicated that borrowing costs would fall in the summer rather than the spring. It also followed the first rise in UK inflation in 10 months.
Lagarde said market expectations for the European Central Bank to cut interest rates this spring “do not help” in the fight against inflation.
The region-wide Stoxx Europe 600 index closed 1.2 percent lower, its worst day since late October. The FTSE 100 index in London closed down 1.5 percent, the weakest session since mid-August.
The losses extended to the United States, where strong retail sales data cast further doubt on the possibility of the Federal Reserve cutting interest rates early. The data showed that spending in December accelerated at the fastest pace since September.
The S&P 500 and Nasdaq Composite indexes fell 0.6 percent in New York, their worst day in two weeks.
“It now appears that hopes for early interest rate cuts from global central banks have been a bit optimistic,” said Charles Hepworth, investment director at GAM Investments.
Asked whether she agreed with her fellow members of the European Central Bank’s Governing Council who indicated that interest rates are expected to be cut this summer, Lagarde said: “I would say it is also possible, but I have to be conservative.”
Lagarde told Bloomberg Television at the World Economic Forum that the ECB will have the information it needs on wage pressures by “late spring.” Such data will be necessary before any decision is made to reduce borrowing costs.
Bond markets were also hit by the sell-off, as British two-year bond yields, which are sensitive to interest rates and move inversely with prices, rose 0.22 percentage points to 4.35 percent. The yield on two-year US bonds rose 0.13 percentage points to 4.35 percent.
Government debt prices were already taking a hit after Fed board member Christopher Waller warned on Tuesday that the US central bank should not rush to cut interest rates, saying policymakers should “take our time to make sure we’re doing it right.” .
In the United Kingdom, an unexpected rise in inflation to 4 percent prompted traders to reduce their bets on interest rate cuts from the Bank of England.
The December figure was the first rise in UK inflation since February 2023.
Matthew Landon, global market strategist at private bank JPMorgan, warned that the data would certainly delay the policy pivot from the Bank of England: “Markets may be very excited about the number of cuts the Bank of England can manage this year.”
As European stocks reacted to the prospect of later-than-expected interest rate cuts, interest rate-sensitive real estate groups were among the worst performers. The French CAC 40 index fell by 1.1 percent, while the German DAX index fell by 0.8 percent.
Speaking a day before the ECB begins a quiet period before its next meeting on January 25, Lagarde said she was increasingly confident that inflation in the euro zone would fall sustainably to the central bank’s 2 percent target in the medium term. Annual price growth in the bloc slowed from a peak of 10.6 percent in October 2022 to 2.9 percent last month.
But the ECB president warned that inflation was still too high in the labour-intensive services sector – at 4 per cent in December – and there was a risk of wage growth rising, leading to a 5.2 per cent rise in wages per employee in the eurozone last year. Which led to maintaining prices. The pressures are very high.
“Absent another major shock, we have reached the peak” in interest rates, she said. “But we have to remain restrained for as long as possible” to ensure inflation remains low. “The risk is that we move too quickly (on rate cuts) and have to come back and do more (rate increases).”
Her comments were backed up by Klaas Knot, head of the Dutch central bank and a member of the ECB’s interest rate setting board, who told CNBC on Wednesday: “The more markets actually ease things for us, the less likely we are to do so.” Lower interest rates, the less likely we are to add to them.”
Additional reporting by Harriet Clarvelt in New York