European stocks and US futures fell on Thursday as two of Europe’s biggest central banks followed the US Federal Reserve in lifting interest rates by half a percentage point to tame inflation.
The regional Stoxx Europe 600 dropped 1.1 per cent in early trading and London’s FTSE 100 fell 0.5 per cent. Contracts tracking Wall Street’s benchmark S&P 500 and those tracking the tech heavy Nasdaq 100 lost 0.9 per cent and 1.2 per cent, respectively.
The declines came after US inflation slowed for the second month in a row in November. This allowed the Fed to raise its main policy rate by 0.5 percentage points, ending a run of four consecutive 0.75 percentage point increases and bringing the federal funds rate to a target range of 4.25 per cent to 4.5 per cent.
The Fed’s turn to smaller rate rises was reflected on the other side of the Atlantic, as the Bank of England, Swiss National Bank and Norwegian central bank all raised rates to combat domestic inflation. The European Central Bank is expected to follow suit later in the day.
The BoE raised its rate to 3.5 per cent while warning that further rate rises were likely. UK inflation cooled to 10.7 per cent in November from 11.1 per cent in October.
Gilts strengthened across the board, with the yield on the UK’s two-year bond down 0.07 percentage points at 3.36 per cent as the price of the debt instrument rose. The yield on the 10-year bond also fell 0.07 percentage points to 3.23 per cent.
Fed chair Jay Powell warned investors that “it will take substantially more evidence to give confidence that inflation is on a sustained downward path”.
The mix of grim predictions and slowing interest rate rises left some frustrated. “Either you believe your policy stance is ‘not sufficiently restrictive’ or you believe it is close enough that a [0.25 percentage point] hike is on the table for February,” said Steve Blitz, chief US economist at TS Lombard. “You cannot believe both.”
Seema Shah, chief global strategist at Principal Asset Management, said the market “still doesn’t seem to buy into the idea that the Fed isn’t going to cut rates through 2023 — there’s something about [Powell’s] messaging which isn’t quite resonating”.
A measure of the dollar’s strength against a basket of six peers gained 0.5 per cent on Thursday in early London trading, benefiting from expectations that US interest rates would remain higher for longer.
Asian markets followed US equities lower, with Hong Kong’s Hang Seng index down 1.6 per cent, while Japan’s Topix lost 0.2 per cent and China’s CSI 300 traded flat.
