Stocks fall after hawkish signals from central bankers

Stocks and eurozone bond markets fell on Thursday, after the chair of the US Federal Reserve reiterated the need to take a hawkish approach to inflation and the European Central Bank raised interest rates by 0.75 percentage points.

Wall Street’s S&P 500 slipped 0.4 per cent after the New York opening bell, after closing the previous session up 1.8 per cent. The Nasdaq Composite, which is stacked with tech stocks that are sensitive to changes in interest rates, lost more than 1 per cent before trimming its declines to trade 0.4 per cent lower.

Speaking at the Cato Institute’s annual monetary conference on Thursday, Fed chair Jay Powell said the US labour market remained “very, very strong” and raised concerns that inflation would become embedded, fuelling expectations of further aggressive rate rises.

European stocks also fell, with the regional Stoxx 600 dropping 0.4 per cent, Germany’s Dax index down 1.6 per cent and London’s FTSE 100 dropping 0.5 per cent following new UK prime minister Liz Truss’s announcement of an estimated £150bn package to shield Britain from soaring energy prices. Truss outlined a cap on energy prices, including a cap on household energy bills over the next two years.

Those moves also came after the ECB announced a 0.75 percentage point interest rate rise to 0.75 per cent, its highest level since 2011. Rate-setters also committed to further rises, underscoring the central bank’s determination to stamp out inflation ahead of economic growth.

The ECB said inflation “remains far too high and is likely to stay above target for an extended period”.

ECB president Christine Lagarde reinforced this message in a press conference, saying that reaching the bank’s “neutral rate” would take “frontloading [and] further hikes in the next several meetings of a magnitude and pace that will be determined meeting by meeting and on the data we will receive”.

Inflation reached a record 9.1 per cent in the eurozone in the year to August.

The 10-year German Bund yield, seen as a proxy for eurozone borrowing costs, added 0.07 percentage points to 1.65 per cent. The yield on the two-year Bund rose 0.14 percentage points to 1.23 per cent. Bond yields rise as their prices fall.

“We should not underestimate the importance of the signal: it’s a highly symbolic if not historic decision,” said Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management. “There was never such a large move in rates: it’s a reflection of the change in the reaction [to inflation].”

US government bond yields were relatively steady, with the yield on the two-year Treasury note adding 0.03 percentage points to 3.48 per cent and the 10-year yield slipping 0.02 percentage points to 3.25 per cent.

In currencies, the euro slipped 0.2 per cent lower, trimming steeper declines to trade just below parity with the dollar. The pound also lost 0.2 per cent against the greenback to $1.151.

In Asian equity markets, Japan’s Topix closed up 2.2 per cent and Hong Kong’s Hang Seng index slipped 1 per cent. Australia’s S&P/ASX 200 added 1.8 per cent after the governor of the Reserve Bank of Australia said it would slow the pace of interest rate rises after five months of increases.


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