Stock and bond markets fell on Friday after upbeat UK retail sales data bolstered expectations that central banks will act quickly to tighten monetary policy.
Wall Street’s S&P 500 fell 1.1 percent shortly after the opening bell in New York, while the tech-heavy Nasdaq Composite lost 1.6 percent . Europe’s Stoxx 600 fell 0.6 percent.
The moves came after a report on Friday pointed to strong spending by British consumers, two days after hotter-than-expected UK inflation data was released. The figures add to fears that rate-setters will aggressively raise borrowing costs globally.
Traders were also looking ahead to next week, when central bankers meet in Jackson Hole, Wyoming, for the Federal Reserve’s annual economic symposium in Kansas City, where they will discuss steps they need to take to curb rampant inflation. . The Jackson Hole summit is often used as a platform for the Fed, the world’s most influential central bank, to make big announcements about its policy stance.
“The narrative in recent weeks has been the idea of the Fed pivoting and inflation under control,” said Kiran Ganesh, multi-asset strategist at UBS Global Wealth Management. “But members of the Fed have rejected that and perhaps some investors are betting that they will sound a more hawkish message in Jackson Hole.”
In government bonds, British gilts came under pressure after the country’s retail sales data showed a month-on-month rise of 0.3% in July, much better than expectations in a Reuters poll for a fall of 0. 2%
The figures pushed Britain’s short-term borrowing costs to their biggest weekly rise in more than a decade, rising 0.08 percentage points to 2.53 percent, about half a percentage point since late last week. Ten-year gilt yields gained 0.11 percentage points to 2.42%.
Selling of UK debt picked up in other bond markets, with Germany’s 10-year Bund yield rising 0.12 percentage points to 1.22 percent and Italy’s equivalent yield gaining 0.16 percentage points to 3.48 percent. The 10-year U.S. Treasury yield, seen as a gauge of global borrowing costs, rose 0.09 percentage points to 2.97%.
Meanwhile, the pound fell 0.9 percent against the dollar to $1.18, while the greenback gained 0.5 percent against a basket of six currencies. China’s renminbi also fell to its lowest level since 2020 against the dollar as markets braced for higher global interest rates.
“It’s easier [for the UK] to dominate global markets when it’s a lean summer month,” said Kit Juckes, a macro strategist at Société Générale, who suggested sterling could fall to $1.15.
But he added: “They are all very related. The UK has the worst trade-off between inflation and growth, but that doesn’t mean that nobody else has had the same trade-off.”
“This is where the good news is the bad,” Ganesh said. The data, which opens the door to big rate hikes, also darkens the outlook for future economic growth on the premise that sharper increases in borrowing costs will push the UK economy deeper into recession, he added.
“Of all the major economies, the UK is closest to falling into the stagnation bucket,” 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 last week.