Global stocks ease as investors dial back on rate cut bets

London — World stocks fell on Wednesday as markets grappled with a central bank pushback against interest rate cut expectations and signs of a patchy economic recovery for China.

The dollar rallied to a one-month peak, a day after Federal Reserve governor Christopher Waller said that while inflation was approaching the US central bank’s 2% goal, the Fed shouldn’t rush to lower rates until lower inflation can clearly be sustained.

European Central Bank (ECB) rate setters also weighed in. Investor bets for ECB rate cuts are excessive and possibly self-defeating because they could hold back monetary easing, Dutch central bank chief Klaas Knot told CNBC on Wednesday.

News of an unexpected rise in UK inflation last month led to a sharp rise in British government bond yields as bets for an early UK rate cut also eased.

Official data showed China’s economy grew 5.2% in 2023, slightly more than the official target, but the recovery was far shakier than analysts expected, with a deepening property crisis, mounting deflationary risks and tepid demand casting a pall over the outlook for this year.

That made for a gloomy trading session with Asian equities slumping almost 2% to a one-month low, while Hong Kong’s stock index dropped more than 3%.

European shares were down over 1%, while US stock futures pointed to a weak open for Wall Street.

“Central bankers, whether from the Fed or the ECB, are saying it’s premature to talk about rate cuts just yet,” said Justin Onuekwusi, CIO at investment firm St. James’s Place.

“So, there is a narrative from central banks pushing back on these expectations and that is causing a lot of volatility, but really this is just unwinding what we saw in the last quarter when markets became too optimistic on rate cuts.”

Markets price in a 65% chance of a Fed rate cut in March, according to the CME FedWatch Tool, compared with the 81% likelihood at the start of the week.

Markets are betting on 140 basis points (bps) of rate cuts from the ECB this year — a drop from 150 bps priced on Tuesday — with the first now seen as more likely in April than in March.

Speaking to Bloomberg TV, ECB President Christine Lagarde said the central bank would be in a position by late spring to review data from 2024 collective agreements and assess where household incomes were going.

Geopolitical concerns have also sapped sentiment as investors keep an eye on developments in the Red Sea, Gaza and Ukraine.

Dollar gain, yuan pain

The dollar index, which measures the US currency against six rivals, touched a fresh one-month high of 103.58.

The dollar was 0.5% firmer at ¥147.90, while euro last fetched $1.0865. Sterling was a touch firmer at $1.26460.

China’s yuan touched its weakest level in almost two months against the greenback.

“The series of China’s economic data releases today [Wednesday] seem to reflect more of the same — an uneven growth environment, which doesn’t offer much conviction of a sustained turnaround just yet,” said Jun Rong Yeap, a market strategist at IG in Singapore.

Government bond yields rose as traders adjusted their rate cut bets, with the two-year UK gilt yield jumping 12 bps to 4.29% after the UK inflation data.

Britain’s annual rate of consumer price inflation sped up for the first time in 10 months in December after an increase in tobacco duty, increasing to 4.0% from a more-than-two-year low of 3.9% recorded in November.

“Despite a December rise, inflation is expected to continue falling this year,” said KPMG chief economist Yael Selfin.

“The expected overall improvement in the outlook for inflation, coupled with the slowdown in the domestic economy, is likely to put the Bank of England in a position to begin cutting interest rates from the second half of the year, potentially lowering rates by 100 bps in 2024.”

Spot gold slipped 0.4% to around $2,020 an ounce.

Reuters