Business

Stocks drop as ECB and UK inflation puncture rate cut hopes

Christine Lagarde says euro zone borrowing costs likely to fall in summer, later than markets expected

ECB president Christine Lagarde arriving in Davos. She said that market expectations for an ECB rate cut this spring were “not helping” the fight against inflation. Photograph: Fabrice Coffrini/Getty

Martin Arnold
Stephanie Stacey
George Steer
Wed Jan 17 2024 - 16:29

Global stocks and bond markets retreated on Wednesday as investors scaled back expectations of swift interest rate cuts in the euro zone, the UK and the US.

The worldwide sell-off came after European Central Bank (ECB) president Christine Lagarde signalled that borrowing costs would come down in summer rather than spring. It also followed the first rise in UK inflation in 10 months.

Ms Lagarde said that market expectations for an ECB rate cut this spring were “not helping” the fight against inflation.

The region-wide Stoxx Europe 600 was down 1.3 per cent by mid-afternoon, while London’s FTSE 100 fell 1.6 per cent. The Iseq was down 0.4 per cent.

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The losses spread to the US as strong retail sales data cast further doubt on the prospect of early cuts by the Federal Reserve.

The S&P 500 was down 0.6 per cent in mid-morning trading on Wall Street, while the tech-heavy Nasdaq Composite fell 1.1 per cent.

Emerging market stocks, which are highly sensitive to interest rates in the developed world, also fell. An MSCI index of emerging market equities was down 1.6 per cent.

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“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, Ms Lagarde said: “I would say it is likely too, but I have to be reserved.”

She told Bloomberg TV at the World Economic Forum in Davos that the ECB would have information it required on wage pressures by “late spring”. Such data would be necessary before any decision to lower borrowing costs.

As European stocks reacted to the prospect of interest rate cuts later than previously expected, rate-sensitive real estate groups were among the worst performers. France’s Cac 40 dropped 1.2 per cent, while Germany’s Dax slipped 1.1 per cent.

Bond markets were also hit by a sell off, with UK 10-year bond yields, which move inversely to prices, climbing 0.17 percentage points to 3.97 per cent. The US 10-year yield rose 0.04 percentage points to 4.11 per cent.

Prices of Government debt had already been hit after US Federal Reserve board member Christopher Waller warned on Tuesday that the US central bank should also not rush to slash rates, saying policymakers should “take our time to make sure we do this right”.

Speaking a day before the ECB’s quiet period starts ahead of its next meeting on January 25th, Ms Lagarde indicated that she was increasingly confident that euro zone inflation would sustainably drop to the ECB’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 per euro zone employee 5.2 per cent 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.” – Copyright The Financial Times Limited 2024

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