Global stocks fell after central banks pushed up interest rates

Global stocks fell after a large group of central banks raised interest rates and warned of further increases as part of the battle to tame inflation.

The benchmark S&P 500 fell 2.5 percent on Thursday, its biggest daily loss since early November, after hawkish interest rate warnings from central banks in the United States, United Kingdom, Europe and Switzerland over the past day. The heavy Nasdaq Composite fell 3.2 percent, also its biggest loss since November. In Europe, the broad Stoxx 600 index fell 2.8 percent, its biggest loss since May.

The US Federal Reserve, the European Central Bank and the Bank of England this week slowed the pace of interest rate hikes, choosing to increase by 0.5 percentage points. But investors were alarmed by the hawkish tone of the meetings, particularly comments from the European Central Bank that “inflation remains too high” and that interest rates will continue to rise by 0.5 percentage point “for a while”.

The Fed on Wednesday finished with four consecutive 0.75 percentage point increases, which pushed the federal funds rate up to its target range between 4.25 percent and 4.5 percent. However, Fed Chairman Jay Powell said, “It will take significantly more evidence to give confidence that inflation is on a sustainable downward path.”

The Fed also released its quarterly forecasts on interest rates, inflation, unemployment and GDP for the coming years. The central bank currently expects interest rates to be at 5.1 percent at the end of 2023, which indicates that the Fed will keep interest rates high even as recession risks mount.

The combination of the Fed’s gloomy outlook and sluggish rate hikes has left some frustrated. Either you think your position on politics is ‘not restrictive enough’ or you think it’s close enough that a [0.25 percentage point] “A rally is on the table for February,” said Steve Blitz, chief US economist at TS Lombard. “You can’t believe both.”

Seema Shah, chief global strategist at Principal Asset Management, said the market “still seems to disagree with the idea that the Fed won’t cut interest rates until 2023 – there is something about [Powell’s] Messages that don’t quite resonate.”

Sentiment was further undermined by weak economic data, which added to fears of an impending recession. The US Commerce Department reported a 0.6 percent month-on-month decline in retail sales in November, the largest decline in 11 months. The decline was more than 0.1 percent, the decline expected by economists polled by Reuters. US industrial production fell by 0.2 percent in November.

Both sets of data suggest that the US economy has “lost some serious momentum, as consumers’ resilience to higher interest rates is beginning to crumble,” said Andrew Hunter, chief US economist at Capital Economics.

Other data showed that 211,000 Americans filed for unemployment benefits last week. This was lower than the previous seven-day period and less than economists had expected, in a sign that a tight domestic labor market may keep inflation high for longer.

The FTSE 100 fell 0.9 percent as the Bank of England raised interest rates to 3.5 percent while warning of the possibility of further price hikes. The pound sterling fell 1.9 percent against the dollar to $1.22, down from a six-month high.

The euro traded 0.4 percent lower against the dollar at $1.06, reversing previous gains.

The yield on two-year German government bonds, which moves according to interest rate expectations, rose to its highest level since 2008 – up 0.05 percentage point to 2.42 percent.

In the treasury market, the 10-year yield, which moves with growth and inflation expectations, fell 0.06 percentage point to 3.45 percent. The two-year Treasury yield fell 0.01 percentage point to 4.24 percent.

Asian markets followed US stocks lower, with Hong Kong’s Hang Seng down 1.6 percent, while Japan’s Topix lost 0.2 percent and China’s CSI 300 traded flat.