Global stock and bond markets dropped on Friday after upbeat UK retail sales data reinforced expectations that central banks will move swiftly to tighten monetary policy.
UK short-term borrowing costs looked set to post their biggest rise this week in more than a decade, climbing 0.12 percentage points on Friday to 2.57 per cent, up about half a percentage point since the end of last week. Such large moves are unusual in the gilt market, which is typically considered a haven during times of broader market tumult.
The surge in two-year yields highlights how investors have ramped up their expectations for rate rises by the Bank of England after hotter than expected inflation data on Wednesday and a report on Friday that pointed to robust British consumer spending.
In turn, the sharp moves in UK government bonds rippled into other stock, currency and bond markets. Short-term debt yields in Germany and Italy rose 0.1 and 0.18 percentage points respectively. Meanwhile, the 10-year US Treasury yield — seen as a proxy for borrowing costs globally — climbed 0.08 percentage points to 2.96 per cent.
The pound fell 0.9 per cent against the dollar to $1.18, while the greenback gained 0.5 per cent against a basket of six currencies. China’s renminbi also fell to its lowest level since 2020 against the dollar as markets priced in higher global interest rates.
“It’s easier [for the UK] to dominate global markets when it’s a thin summer month,” said Kit Juckes, a macro strategist at Société Générale, who suggested that sterling could drop 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 anybody else hasn’t got the same trade-off.”
In stock markets, futures contracts tracking Wall Street’s S&P 500 and the tech-heavy Nasdaq 100 slid about 1 per cent. Europe’s Stoxx 600 slipped 0.3 per cent. London’s FTSE 100 added 0.2 per cent.
UK retail sales data on Friday showed a month-on-month rise of 0.3 per cent in July, much better than expectations in a Reuters poll for a fall of 0.2 per cent.
The data were skewed by a strong rise in online sales due to Amazon’s Prime Day sale, but showed how consumers are still spending even as the cost of living crisis bites, with consumer price index figures this week showing a 10.1 per cent rise in inflation year-on-year to July.
“This is where good news is bad news,” said Kiran Ganesh, a multi-asset strategist at UBS Global Wealth Management. Data that open the door to big rate rises also darken the outlook for future economic growth on the premise that sharper increases in borrowing costs will knock the UK economy into a deeper recession, he added.
“Of all the major economies, the UK is closest to falling into the stagflation bucket,” said Ganesh.
Money markets are now pointing to expectations that the BoE will raise its main interest rate by about 2.2 percentage points by the end of May 2023, up from about 1.6 percentage points at the end of last week.
Traders are also looking towards next week, when central bankers will meet at Jackson Hole, Wyoming, for the Kansas City Federal Reserve’s annual economic symposium at which they will discuss the steps they need to take to rein in rampant inflation. The Jackson Hole summit is often used as a platform for the Fed, the world’s most influential central bank, to make major announcements on its policy stance.
“The narrative over recent weeks has been the idea of the Fed pivoting and inflation coming under control,” said Ganesh. “But Fed members have pushed back against that and perhaps some investors are putting on bets that they’ll sound a more hawkish message at Jackson Hole.”
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