Global equities plummeted after a broad group of central banks hiked rates and warned of further rises in the battle to contain inflation.
The benchmark S&P 500 index fell 2.5 percent on Thursday, its biggest daily loss since early November, following aggressive warnings about interest rates from central banks in the US, UK, Europe and Switzerland over the past day. 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, the European Central Bank and the Bank of England all slowed the pace of interest rate hikes this week, opting for increases of 0.5 percentage points. But investors were unnerved by the aggressive tone of the meetings, particularly with comments from the ECB that “inflation remains far too high” and that interest rates would continue to rise by 0.5 percentage points “over a period of time”.
On Wednesday, the Fed ended a series of four consecutive 0.75 percentage point increases, bringing the federal funds rate to a target range of between 4.25 percent and 4.5 percent. However, Fed Chairman Jay Powell said “significantly more evidence will be needed to inspire confidence that inflation is on a sustained downward path.”
The Fed has also released its quarterly forecasts on where interest rates, inflation, unemployment and GDP will be in the coming years. The central bank currently expects interest rates to hit 5.1 percent by the end of 2023, suggesting the Fed will keep rates high even as recession risk increases.
The Fed’s mix of grim forecasts and slowing rate hikes has frustrated some. “Either do you believe that your policy stance is ‘not restrictive enough’, or do you think it is close enough to a [0.25 percentage point] An increase is on the table for February,” said Steve Blitz, chief US economist at TS Lombard. “You can’t believe them both.”
Seema Shah, chief global strategist at Principal Asset Management, said the market “still doesn’t seem to agree with the idea that the Fed isn’t going to cut rates until 2023 – something is up [Powell’s] messages that don’t quite resonate”.
Sentiment was further undermined by weak economic data, fueling fears of an impending recession. The U.S. Commerce Department reported a 0.6 percent month-on-month drop in retail sales in November, the biggest drop in 11 months. The drop was more than the 0.1 percent drop predicted by economists polled by Reuters. US industrial production fell 0.2 percent in November.
The two sets of data indicate that the U.S. economy has “lost some serious momentum, with consumer resilience against much higher interest rates beginning to crumble,” said Andrew Hunter, senior U.S. economist at Capital Economics.
Other data showed that 211,000 Americans filed for unemployment assistance last week. That was less than the previous seven-day period and lower than economists’ forecasts, a sign that the tight domestic labor market could keep inflation high for longer.
The FTSE 100 fell 0.9 percent as the BoE raised its rate to 3.5 percent and warned that further rate hikes were likely. Sterling fell 1.9 percent against the dollar to $1.22, a drop from a six-month high.
The euro traded 0.4 percent lower against the dollar at $1.06, erasing previous gains.
The yield on the German two-year government bond, which moves in line with interest rate expectations, rose to its highest level since 2008: an increase of 0.05 percentage point to 2.42 percent.
In the Treasury market, the 10-year interest rate, which moves in line with growth and inflation expectations, fell by 0.06 percentage point to 3.45 percent. The yield on two-year Treasury bills fell by 0.01 percentage point to 4.24 percent.
Asian markets trailed US equities lower, with Hong Kong’s Hang Seng index down 1.6 percent, while Japan’s Topix lost 0.2 percent and China’s CSI 300 remained flat.