Stock and bond markets fell on Friday after upbeat UK retail sales data bolstered expectations that central banks will move quickly to tighten monetary policy.
Wall Street’s S&P 500 stock index fell 1.1% shortly after the opening bell in New York, while the tech-heavy Nasdaq Composite lost 1.6%. The European Stoxx 600 fell 0.6%.
The moves came after a report on Friday highlighted the robustness of UK consumer spending, two days after stronger-than-expected UK inflation data was released. The figures added to fears that rate setters were aggressively raising borrowing costs globally.
Traders were also looking ahead to next week, when central bankers gather in Jackson Hole, Wyoming, for the Kansas City Federal Reserve’s annual economic symposium where they will discuss steps to rein in runaway inflation. The Jackson Hole summit is often used as a platform by the Fed, the world’s most influential central bank, to make big announcements about its policy stance.
“The narrative for the past few weeks has been the idea of a Fed pivot and inflation being brought under control,” said Kiran Ganesh, multi-asset strategist at UBS Global Wealth Management. “But Fed members pushed back on that and maybe some investors are betting they’ll send a more hawkish message to Jackson Hole.”
In government bonds, Britain’s gilts came under pressure after the country’s retail sales data showed a monthly rise of 0.3% in July, much better than expectations from a Reuters poll for a down 0.2%.
The figures pushed UK short-term borrowing costs to their biggest weekly rise in more than a decade, climbing 0.08 percentage point to 2.53%, up around half -percentage point since the end of last week. Ten-year gilt yields rose 0.11 percentage points to 2.42%.
The sell-off of UK debt spilled over into other bond markets, with the German 10-year Bund yield rising 0.12 percentage points to 1.22% and the Italian equivalent yield rising 0.16 percentage points. at 3.48%. The 10-year US Treasury yield – considered a proxy for global borrowing costs – climbed 0.09 percentage points to 2.97%.
Meanwhile, the pound fell 0.9% against the dollar to $1.18, while the greenback gained 0.5% against a basket of six currencies. The Chinese renminbi also fell to its lowest level since 2020 against the dollar as markets priced in rising global interest rates.
“It’s easier [for the UK] to dominate global markets when it’s a lean summer month,” said Kit Juckes, macro strategist at Societe Generale, who suggested the pound could fall to $1.15.
But he added: “They are all so correlated. The UK has the worst trade-off between inflation and growth, but that doesn’t mean no one else has the same trade-off.
“This is where good news becomes bad news,” Ganesh said. The data that opens the door to big rate hikes also dims the outlook for future economic growth on the premise that bigger increases in borrowing costs will push the UK economy into a deeper recession, he said. added.
“Of all the major economies, the UK is the closest to falling into the bucket of stagflation,” Ganesh said.
Money markets are now pointing to expectations that the BoE will raise its main interest rate by around 2.2 percentage points by the end of May 2023, up from around 1.6 percentage points at the end of the week. last.