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Global stock and bond markets fell on Wednesday as investors dialed back hopes for swift interest rate cuts in the euro zone, Britain and the United States.
The global selloff came after European Central Bank President Christine Lagarde suggested borrowing costs would fall in the summer rather than the spring. Britain's inflation rate continued to rise for the first time in 10 months.
Lagarde said market expectations for an ECB rate cut this spring were “not helping” the fight against inflation.
The region-wide Stoxx Europe 600 index ended 1.2% lower, its worst day since late October. London's FTSE 100 index ended 1.5% lower, its lowest since mid-August.
Losses also spread to the United States, as strong retail sales data cast further doubt on the prospect of an early interest rate cut by the Federal Reserve. Spending accelerated in December at the fastest pace since September, data showed.
In New York, the S&P 500 and the Nasdaq Composite Index both fell 0.6%, marking their worst day in two weeks.
“Expectations for early interest rate cuts by global central banks seem to have been a bit optimistic,” said Charles Hepworth, investment director at GAM Investments.
Asked if she agreed with other ECB Governing Council members who have suggested that a rate cut is expected this summer, Lagarde said: “I would say it is likely, but I have to have reservations.'' It must be done,” he said.
Lagarde told Bloomberg TV at the World Economic Forum that the ECB would have the information it needs on wage pressures by “late spring.” Such data will be needed before decisions are made to lower borrowing costs.
The bond market was also hit by a sell-off, with the yield on UK two-year bonds, which are inversely proportional to prices and sensitive to interest rates, rising 0.22 percentage points to 4.35%. The yield on US two-year bonds rose 0.13 percentage points to 4.35%.
The U.S. central bank also should not be in a hurry to cut interest rates, after Fed Director Christopher Waller warned on Tuesday that policymakers should “take the time to make sure we get this right.” Bond prices were already taking a hit.
In the UK, traders scaled back bets on a Bank of England interest rate cut after inflation unexpectedly rose to 4%.
December's figures are the first time UK inflation has risen since February 2023.
Matthew Landon, global market strategist at JPMorgan Private Bank, warned that the data will almost certainly delay a policy shift by the BoE. [BoE] I'm sure I'll be able to do it this year. ”
Rate-sensitive real estate groups were the worst performers as European stock markets reacted to the prospect of slower-than-expected interest rate cuts. France's CAC40 fell 1.1% and Germany's Dax fell 0.8%.
Speaking the day before the ECB begins its quiet period ahead of its next Governing Council meeting (January 25), Lagarde announced that inflation in the euro area will fall sustainably to the central bank's 2% target in the medium term. He said there is growing confidence that Annual price growth in the region slowed from a peak of 10.6% in October 2022 to 2.9% last month.
However, the ECB president said that inflation in the labor-intensive services sector remains too high (4% in December) and risks high wage growth, which last year brought wages per euro area employee to 5.2%. % and warned that prices were holding steady. Pressure is too high.
He said interest rates had “peaked before any further major shocks occurred.” “But to ensure that inflation continues to fall, we must continue to restrict it for as long as necessary.'' “The danger is to go too fast.'' [on rate cuts] And I have to come back and do more. [rate increases]”
His comments were backed up by Klaas Nott, president of the Dutch central bank and member of the ECB rate-setting board, who told CNBC on Wednesday: The more you cut rates, the less likely you are to raise them again. ”
Additional reporting by Harriet Klarfelt in New York
