On Wednesday, Governing Council member Klaas Knot and President of the European Central Bank Christine Lagarde issued dire warnings to policymakers, stating that their aggressive bets on interest-rate reduction aren’t helping them combat persistent price pressures. This came as Federal Reserve Governor Christopher Waller cautioned on Tuesday over the rate of lowering.
Money markets pushed back bets on the timing of the ECB’s first quarter-point cut to June from April, while swaps market pricing for a Fed rate decrease in March plummeted to about 65% from 80% on Friday.
As we have seen in the US and Europe, inflation was never going to be a straight line downward, according to Luke Hickmore, investment director at abrdn. “This year, rates will decline, but market expectations regarding the exact timing and amount will be highly unpredictable.”
Futures for the S&P 500 and Nasdaq 100 dropped by almost 0.5%, indicating that US stocks may have another rough day. The dollar continued to rise for a fourth day, and the Treasury two-year yield—one of the most susceptible to shifts in monetary policy—rose six basis points to 4.29%. Wall Street’s “Fear Gauge,” the CBOE Volatility Index, surged to a two-month high.
In the meantime, new worries over China’s economy created yet another obstacle for stocks. Chinese equities listed in the US had a decline in premarket activity. The KraneShares CSI China Internet Fund, an exchange-traded fund that invests in over thirty IT companies listed in the US and Hong Kong, saw a decline of more than 3%.
Concerns about slowing demand in China, a vital market, led to significant losses in European stockpiles of luxury products and basic commodities. The decline in the Stoxx Europe 600 index was above 1%. Every industry sector was in the negative, with retailers and real estate suffering the most. Two-year German rates increased by five basis points to 2.65%.
The Hang Seng Index in Hong Kong fell by about 4%. Additionally, the benchmark CSI 300 mainland Chinese sank by 2.2%. The losses occurred as official data revealed that although China’s economy met its 2023 target, the nation’s housing crisis deepened and domestic demand remained uninterested.
The UK provided more proof that the fight against inflation is far from done, as price hikes there unexpectedly picked up steam for the first time in ten months, which caused traders to lower their expectations for rate reduction from the Bank of England this year. As speculators aggressively reduced prospects for monetary policy easing this year, gilts fell and the pound rose.
Commodities fell, with oil down as worries about the growing tensions in the Middle East—including ongoing attacks on ships in the Red Sea by Iran-backed Houthi rebels—were mitigated by the pull of a stronger US currency and a general tone of risk aversion.
In other news, Bitcoin fell below $43,000 while gold held constant at $2,028 an ounce following a more than 1% decrease on Tuesday.