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Global stock and bond markets tumbled on Wednesday as investors scaled back expectations for swift interest rate cuts in the euro zone, Britain and the United States.
The worldwide sell-off came after European Central Bank President Christine Lagarde signaled that borrowing costs would fall in the summer rather than the spring. It also follows the first rise in UK inflation for 10 months.
Lagarde said market expectations of an ECB interest rate cut this spring “do not help” the fight against inflation.
The region-wide Stoxx Europe 600 index closed down 1.2%, its worst day since late October. London’s FTSE 100 ended down 1.5%, its weakest session since mid-August.
The losses spread to the US as strong retail sales data added to doubts about the prospect of an early interest rate cut by the Federal Reserve. Spending in December accelerated at the fastest pace since September, data showed.
The S&P 500 and Nasdaq Composite stock indexes both fell 0.6% in New York, their worst day in two weeks.
“For now, it seems that hopes of an early rate cut from global central banks are a bit optimistic,” said Charles Hepworth, chief investment officer at GAM Investments.
Asked whether she agreed with ECB board members who have signaled an interest rate cut this summer, Lagarde said: “I would say that too It’s a possibility, but I have to be cautious.”
Lagarde told Bloomberg TV at the World Economic Forum that the ECB will have the necessary information on wage pressures by “late spring.” Such data will be needed before making any decisions to reduce borrowing costs.
The bond market was also affected by the sell-off, with interest rate-sensitive UK two-year bond yields moving inversely to prices, rising 0.22 percentage points to 4.35%. US two-year bond yields rose 0.13 percentage points to 4.35%.
Government debt prices took a hit after Fed board member Christopher Waller on Tuesday warned the US central bank against rushing to cut interest rates, saying policymakers should “take the time to make sure we do this right.”
In the UK, a surprise rise in inflation to 4% prompted traders to reduce bets on interest rate cuts from the Bank of England.
December’s figure was the first rise in UK inflation since February 2023.
Matthew Landon, global markets strategist at JPMorgan Private Bank, warned the data will almost certainly delay a policy shift from the BoE: “Markets may be overenthusiastic about how much to cut.” percent.” [BoE] can manage this year.”
As European stocks reacted to the prospect of interest rate cuts later than expected, interest-rate-sensitive real estate groups were among the worst performers. France’s CAC 40 fell 1.1%, while Germany’s Dax fell 0.8%.
Speaking a day before the ECB’s quiet period begins ahead of its next meeting on January 25, Lagarde said she was increasingly confident that euro zone inflation would fall sustainably to the EU’s 2% target. central bank in the medium term. Annual price growth in the bloc has slowed from a peak of 10.6% in October 2022 to 2.9% last month.
However, the ECB president warned inflation remained too high in the labour-intensive services sector – at 4% in December – and there was a risk of high wage increases, pushing wages up to 5.2% for per euro zone employee last year, keeping prices. the pressure is too high.
“Barring another big shock, we have reached the peak” in interest rates, she said. “But we must limit it for as long as necessary” to ensure inflation continues to decline. “The risk is that we go too fast [on rate cuts] and have to go back and do more [rate increases].”
Her comments were backed by Klaas Knot, head of the Dutch central bank and a member of the ECB’s exchange rate governing council, who told CNBC on Wednesday: “The more the market loosens, the more the less likely we are to be able to do it.” cut interest rates the less likely we are to add to that.”
Additional reporting by Harriet Clarfelt in New York