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Global Stocks Tumble
Global stocks decline as ECB and UK inflation data prompt reevaluation of imminent rate cut expectations.
Global stock and bond markets experienced a significant downturn on Wednesday, driven by dampened expectations for prompt interest rate cuts in the eurozone, the UK, and the US. This shift followed remarks from European Central Bank (ECB) President Christine Lagarde, indicating a rate cut in summer rather than spring, and was exacerbated by the UK's first inflation rise in 10 months.
I would say it is likely too, but I have to be reserved. — Christine Lagarde
Lagarde's Comments Trigger Market Retreat
Lagarde's statement that spring rate cut expectations were counterproductive to combating inflation sent the Stoxx Europe 600 down by 1.2%, marking its worst day since late October. The FTSE 100 in London also declined by 1.5%, its weakest session since mid-August. The US markets mirrored this trend, with the S&P 500 and Nasdaq Composite falling 0.9% and 1.2%, respectively, partly due to strong US retail sales data that cast doubt on the Federal Reserve's likelihood of early rate cuts.
Inflation Surprises And Central Bank Caution
In the UK, inflation's unexpected rise to 4% in December 2023, the first increase since February 2023, led investors to reevaluate their expectations for Bank of England rate cuts. This data, alongside Lagarde's cautious stance on ECB rate cuts, signals a potential delay in monetary policy shifts. She stressed the need for comprehensive wage pressure data by late spring before any decision to lower borrowing costs.
Impact On Real Estate And Bond Markets
The prospect of later-than-anticipated interest rate cuts impacted rate-sensitive sectors, particularly real estate. France's CAC 40 and Germany's Dax fell 1.1% and 0.8%, respectively. Bond markets also suffered, with UK two-year bond yields rising to 4.38% and US two-year yields increasing to 4.37%. These movements were influenced by Federal Reserve board member Christopher Waller's warning against rushing rate cuts in the US.
ECB's Inflation Outlook And Future Rate Decisions
Lagarde expressed confidence in the eurozone's inflation trajectory towards the ECB's 2% target, noting a decline from a peak of 10.6% in October 2022 to 2.9% last month. However, she cautioned against high inflation in the labor-intensive services sector and the risk of elevated wage growth, which saw a 5.2% increase in pay per eurozone employee last year. This cautious approach aligns with comments from Klaas Knot, head of the Dutch central bank, who emphasized the influence of market easing on the ECB's rate decisions.
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