Global stocks tumbled after a broad group of central banks hiked interest rates and warned of more rate hikes to fight inflation.
The benchmark S&P 500 index fell 2.5 percent on Thursday, its biggest one-day drop since early November, after central banks in the US, UK, Europe and Switzerland last day issued hawkish interest rate warnings. The tech-heavy Nasdaq Composite fell 3.2 percent, also its biggest loss since November. In Europe, the broad Stoxx 600 fell 2.8 percent, its biggest loss since May.
The US Federal Reserve, European Central Bank and Bank of England all slowed the pace of rate hikes this week, opting for a 0.5 percentage point hike. But investors were unnerved by the hawkish tone of the meetings, particularly with comments from the ECB that “inflation remains far too high” and that rates would continue to rise by 0.5pp “for a period of time”.
On Wednesday, the Fed ended a series of four consecutive 0.75 percentage point hikes, bringing the federal funds rate to a target range of between 4.25 percent and 4.5 percent. However, Fed Chairman Jay Powell said: “It will take a lot more evidence to inspire confidence that inflation is on a sustained downward path.”
The Fed also released its quarterly forecasts of how interest rates, inflation, unemployment and GDP will develop in the coming years. The central bank currently expects rates to end 2023 at 5.1 percent, suggesting the Fed will keep rates high even as the risk of a recession rises.
The mix of bleak forecasts and faltering rate hikes from the Fed has left some frustrated. “Either you think your policy stance is ‘not restrictive enough’ or you think it’s close enough that a [0.25 percentage point] The hike is on the table for February,” said Steve Blitz, chief US economist at TS Lombard. “You can’t believe either.”
Seema Shah, chief global strategist at Principal Asset Management, said the market “still doesn’t seem to believe the idea that the Fed won’t cut rates until 2023 – there’s something to it [Powell’s] Messages that don’t quite get through”.
Sentiment was further undermined by weak economic data, adding to fears of an imminent recession. The US Department of Commerce reported a 0.6 percent month-on-month decline in retail sales in November, the largest drop in 11 months. The drop was larger than the 0.1 percent drop forecast by economists polled by Portal. US industrial production fell 0.2 percent in November.
The two sets of data suggest the US economy has “lost significant momentum as consumer resilience to much higher interest rates begins to crumble,” said Andrew Hunter, senior US economist at Capital Economics.
Other data shows that 211,000 Americans filed for unemployment benefits in the past week. That was lower than in the previous seven days and lower than economists had forecast, in a sign that the tight domestic labor market could be keeping inflation high for longer.
The FTSE 100 fell 0.9 percent as the BoE hiked interest rates to 3.5 percent while warning that more rate hikes were likely. Sterling slipped 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, erasing earlier gains.
The yield on the two-year federal bond, which moves with interest rate expectations, rose to its highest level since 2008 – an increase of 0.05 percentage points 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 trailed US stocks lower, with Hong Kong’s Hang Seng Index slipping 1.6 percent, while Japan’s Topix lost 0.2 percent and China’s CSI 300 was flat.