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Central banker comments, economic data shatter rate cut hopes

Equity markets across the globe traded lower another day as central bankers continued to push back against market expectations for interest rate cuts in the spring. Solid economic data out of the US and a reacceleration of inflation in the UK also forced traders to consider the possibility of higher rates for longer. The Dollar Index was hovering around the highest values in a month and the CBEO Volatility Index – which gauges market fear – hit its highest level since early November.

Shane Strowmatt, LGT
Tempo di lettura
5 minuto
Christine Lagarde
© Shutterstock

Support at the European Central Bank’s (ECB) Governing Council for interest rate cuts isn’t likely to come until the summer, later than investors’ current expectations for rate cuts in the spring, ECB President Christine Lagarde said Wednesday in an interview at the World Economic Forum in Davos. Governing Council member Klass Knot likewise said that the market’s aggressive expectations for rate cuts weren’t helping the ECB to rein in inflation and thereby make it more difficult for the ECB to end its aggressive monetary policy. Inflation in the euro zone was 2.9% in December when compared to the same period a year earlier, up from 2.4% in November. Also released on Wednesday was inflation data out of the UK, where inflation rose in December for the first time in 10 months. The Consumer Price Index increased to 4% on the year in December from 3.9% in November. The resurgence of inflation on the continent is increasing the likelihood of central banks keeping rates higher for longer and weighing on market sentiment in Europe and beyond. The Euro Stoxx 50 slumped 1% on Wednesday and all other major European indices closed lower as well.

In New York, stock indices were also under pressure midweek as solid economic data smashed hopes that the Federal Reserve (Fed) will soon cut interest rates. US retail sales increased by 0.6% in December, the fastest pace in three months. A strong US consumer was largely responsible for the relative strength of the US economy last year and the strong data hints that consumption may remain high into the new year. That dampened market sentiment, which had recently soared high on expectations of quick interest rate cuts as the Fed soon looks to prop up the economy. The Dow Jones Industrial lost 0.3%, while the S&P 500 and Nasdaq-100 both lost 0.6%.

In the Asia-Pacific region, stock markets were mixed on Thursday. In Tokyo, the Nikkei 225 fell slightly and South Korea’s Kospi closed up 0.2%. Hong Kong's Hang Seng Index reversed some losses from earlier in the week, trading up 0.5%, while the Shanghai Composite was down 0.5%. Australia‘s S&P/ASX 200 extended losses to a fifth day in a row, closing down 0.6% despite the country posting steady unemployment at 3.9% in December.

Corporate news in focus: There is no major corporate news scheduled today.

Economic data in focus: The World Economic Forum continues in Davos, US building permits, European Central Bank President Christine Lagarde speaks in Davos, weekly US EIA Petroleum Status Report.


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Editor: Alessandro Fezzi
Source: LGT Bank (Switzerland) Ltd.