Investors are reducing their bets on interest rate cuts as fears about persistently high inflation on both sides of the Atlantic send shock waves through financial markets.
In a blow to millions of borrowers hoping for cheaper mortgages in the UK, figures from the Office for National Statistics sparked fears that wages in the UK are rising too fast for the Bank of England to cut rates.
While earlier this year the central bank was expected to cut rates up to six times in 2024, it is now thought there could be as few as two reductions.
A separate report in the United States showed that inflation in the world’s largest economy is not falling as fast as expected, affecting the prospect of early action by the Federal Reserve.
The double whammy of strong wage growth in the United Kingdom and “hot” inflation in the United States sent stock markets tumbling.
Sticky: Investors are reducing their bets on interest rate cuts as fears about persistently high inflation on both sides of the Atlantic send shock waves through financial markets.
The FTSE 100 index fell 0.8 per cent, or 61.41 points, to 7,512.28 – a drop echoed by benchmark indices across Europe – with housebuilders among the hardest hit after concerns that mortgage rates will remain elevated for some time.
In New York, the Dow Jones lost 1.4 percent, the S&P 500 fell 1.4 percent and the Nasdaq fell 1.8 percent.
The unrest spread to bond markets, with the UK two-year bond yield hitting 4.67 percent for the first time since November and the ten-year bond rising above 4.1 percent for the first time in more than two. months.
The pound rose to a six-month high against the euro of 1.1763 euros, but both currencies fell against a resurgent dollar.
Chris Zaccarelli, chief investment officer at Independent Advisor Alliance in Charlotte, North Carolina, said the latest numbers “make one worry that inflation is going to be stiffer than we expected and that rates will stay high for longer.” time”. And he added: “Everyone’s biggest fear is that inflation will remain stable.”
Peter Cardillo, chief market economist at Spartan Capital Securities in New York, said: “It’s too early to say inflation has been defeated.”
In the UK, the ONS said wages in the final three months of 2023 were 6.2 percent higher than a year earlier.
It was the smallest increase in more than a year, but analysts warned it was still too strong to pave the way for rate cuts in the near term.
The Bank of England is concerned that wages will continue to rise too quickly for inflation to return to the 2 percent target, after hitting a 40-year high of 11.1 percent in October 2022.
Although inflation has fallen, it rose from 3.9 percent in November to 4 percent in December, in a stark reminder that the job is not done yet. The ONS will publish January inflation figures today.
Another ONS report will reveal tomorrow whether Britain fell into a shallow recession in the second half of 2023 as higher interest rates took their toll.
Earlier this year, investors were betting that rates could be cut to 3.75 percent by Christmas.
But there are now fears that rates will fall to just 4.75 per cent or 4.5 per cent this year, with the first move coming in September.
With US inflation hitting 3.1 percent in January – down from 3.4 percent in December but higher than the expected 2.9 percent – analysts also ruled out an early rate cut by the Fed. Federal.