Stocks hit by rate-cut pushback, China takes a beating

World stocks and bonds took a hit on Wednesday as central banks pushed back against interest rate cut bets, while signs of a patchy economic recovery in China drove shares in the world’s second biggest economy to their lowest in almost five years.

The dollar rose to a one-month peak, a day after Federal Reserve Governor Christopher Waller said that, although inflation was approaching the U.S. central bank’s 2 per cent goal, the Fed should not rush to lower rates until lower inflation could clearly be sustained.

European Central Bank (ECB) rate setters weighed in. ECB rate cuts were excessive and possibly self-defeating because they could hold back monetary easing, Dutch central bank chief Klaas Knot told CNBC on Wednesday.

Germany’s benchmark 10-year bond yield hit a one-month high as rate-cut optimism wavered. British gilt yields jumped, their prices falling, after an unexpected rise in UK inflation last month prompted bets for an early UK rate cut to be dialled back.

“Central bankers, whether from the Fed or the ECB, are saying it’s premature to talk about rate cuts just yet,” said Justin Onuekwusi, chief investment officer at investment firm St. James’s Place.

“So, there is a narrative from central banks pushing back on these expectations and that is causing a lot of volatility, but really this is just unwinding what we saw in the last quarter when markets became too optimistic on rate cuts.”

European shares fell more than 1 per cent (.STOXX), opens new tab, London’s blue-chip FTSE slid 1.6 per cent and U.S. stock futures pointed to a weak open for Wall Street , .

Markets price in a 65 per cent chance of a Fed rate cut in March, according to the CME FedWatch tool, compared with the 81 per cent likelihood at the start of the week.

And traders are betting on 140 basis points (bps) of rate cuts from the ECB this year – a drop from 150 bps priced on Tuesday – with the first now seen as more likely in April than in March.

Speaking to Bloomberg TV, ECB President Christine Lagarde said the central bank would be in a position by late spring to review data from 2024 collective agreements and assess where household incomes were going.

Geopolitical worries have also sapped sentiment as investors keep an eye on developments in the Red Sea, Gaza and Ukraine.

China’s blue-chip index (.CSI300), opens new tab fell to its lowest level in almost five years and Hong Kong’s Hang Seng Index (.HSI), opens new tab tumbled 3.7 per cent to 14-month lows as weak growth and property data deepened worries around the country’s outlook.

Asia shares outside Japan fell to fresh one-month lows (.MIAPJ0000PUS), opens new tab.

Data showed China’s economy grew 5.2 per cent in 2023, slightly more than the official target, but the recovery was far shakier than analysts expected, with a deepening property crisis, mounting deflationary risks and tepid demand casting a pall over the outlook for this year.

Property shares in China and Hong Kong are seeing their worst start to a year on record, according to LSEG data.

The yuan touched its weakest level in nearly two months against the dollar, while concern about weak China demand hurt oil markets.

U.S. crude fell just over 2 per cent to $70.90 per barrel and Brent was at $76.87, down about 1.8 per cent.

“The series of China’s economic data releases today seem to reflect more of the same – an uneven growth environment, which does not offer much conviction of a sustained turnaround just yet,” said Singapore-based IG market strategist Jun Rong Yeap.

Elsewhere, the dollar index , which measures the U.S. currency against six peers, hit a fresh one-month high of 103.58.

The dollar was 0.4 per cent firmer at 147.75 yen , while the euro fetched $1.0872 – little changed on the day – and sterling firmed 0.4 per cent to $1.26765.

Britain’s two-year gilt yield jumped 12 bps to 4.29 per cent on news that Britain’s annual rate of inflation sped up for the first time in 10 months in December, increasing to 4.0 per cent from a more-than-two-year low of 3.9 per cent in November.

“Despite a December rise, inflation is expected to continue falling this year,” said KPMG chief economist Yael Selfin.

“The expected overall improvement in the outlook for inflation, coupled with the slowdown in the domestic economy, will likely put the Bank of England in a position to begin cutting interest rates from the second half of the year, potentially lowering rates by 100 bps in 2024.”