Global stocks and bond markets retreated on Wednesday as investors scaled back expectations of swift interest rate cuts in the eurozone, the UK and the US.
The worldwide sell-off came after European Central Bank president Christine Lagarde signalled that borrowing costs would come down in the summer rather than spring. It also followed the first rise in UK inflation 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 closed 1.2 per cent lower, its worst day since late October. London’s FTSE 100 finished down 1.5 per cent, the weakest session since mid-August.
The losses spread to the US as strong retail sales data cast further doubt on the prospect of early rate cuts by the Federal Reserve. The data showed that spending in December accelerated at the fastest pace since September.
The S&P 500 and the Nasdaq Composite stock indices both fell 0.6 per cent in New York, their worst day in two weeks.
“It now seems that hopes for early cuts in rates from global central banks were a tad optimistic,” said Charles Hepworth, investment director at GAM Investments.
Asked if she agreed with fellow ECB governing council members who have signalled a rate cut is expected this summer, Lagarde said: “I would say it is likely too, but I have to be reserved.”
Lagarde told Bloomberg TV at the World Economic Forum that the ECB would have the information it required on wage pressures by “late spring”. Such data would be necessary before any decision was made to lower borrowing costs.
Bond markets were also hit by a sell-off, with interest rate-sensitive UK two-year bond yields, which move inversely to prices, climbing 0.22 percentage points to 4.35 per cent. The US two-year yield rose 0.13 percentage points to 4.35 per cent.
Prices of government debt had already been hit after Fed board member Christopher Waller on Tuesday warned the US central bank should also not rush to cut rates, saying policymakers should “take our time to make sure we do this right”.
In the UK, the unexpected rise in inflation to 4 per cent prompted traders to scale back bets on rate cuts from the Bank of England.
December’s figure was the first rise in UK inflation since February 2023.
Matthew Landon, global market strategist at JPMorgan Private Bank, warned the data would almost certainly delay a policy pivot from the BoE: “Markets may be too enthusiastic about how many cuts the [BoE] can manage this year.”
As European stocks reacted to the prospect of interest rate cuts coming later than expected, rate-sensitive real estate groups were among the worst performers. France’s CAC 40 dropped 1.1 per cent, while Germany’s Dax slipped 0.8 per cent.
Speaking a day before the ECB’s quiet period starts ahead of its next meeting on January 25, Lagarde said she was increasingly confident that eurozone inflation would sustainably drop to the central bank’s 2 per cent target in the medium term. Annual price growth in the bloc has slowed from a peak of 10.6 per cent in October 2022 to 2.9 per cent last month.
But the ECB president warned inflation was still too high in the labour-intensive services sector — at 4 per cent in December — and there was a risk of high wage growth, which pushed up pay 5.2 per cent per eurozone employee last year, keeping price pressures too high.
“Short of another major shock we have reached a peak” in interest rates, she said. “But we have to stay restrictive for as long as necessary” to ensure inflation keeps falling. “The risk would be we go too fast [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 rate-setting governing council, who told CNBC on Wednesday: “The more easing the markets has already done for us, the less likely we will cut rates, the less likely we’ll add to it.”
Additional reporting by Harriet Clarfelt in New York