'Sticky inflation' and rate hike fears push global shares lower

European stock markets suffered their worst losses this year in the wake of renewed sell-off

Fri, 24 Feb, 2023 - 20:01

Eamon Quinn

Global shares fell as fears that interest rates would be heading higher for longer remerged after data showed underlying inflation in the US was running hotter than believed.

The renewed sell-off means that, in the past week, European stock markets suffered their worst losses this year.

Investors fear that the data for US core inflation will lead to the US Federal Reserve as well as the European Central Bank raising interest rates further and delaying decisions for any rate cuts longer than financial markets were anticipating. Further ECB rate increases would be passed on to households by Irish banks, experts have predicted.

Eurozone government bond yields, including those for Ireland, rose sharply to around their highest levels in more than a decade, implying that the cost of borrowing for the State will rise.

Traders forecast that European interest rates will now peak at around 3.8%.

“US inflation looks to be a problem that will not be going away anytime soon,” said Chris Beauchamp, chief market analyst at online broker IG in London, citing concerns that the US central bank will react to the “sticky” nature of inflation by delaying any rate cut into 2024.

This recent slew of strong data could be turning into a trend, reinforcing the hawkish tendencies of central banks across the globe, but especially in the case of the Fed.

The rise in the measure of inflation most favoured by the US central bank has also raised fears that the Federal Reserve will overreact in its fight against price increases.

“It looks like the Fed will have to be more aggressive,” said Yelena Shulyatyeva, an economist at BNP Paribas.

“They will probably overdo it, in our view, and that will eventually lead to a recession; the question is more like when, not whether, it will be a recession,” she said.

The rise in the measure of inflation most favoured by the US central bank has raised fears that the Fed will overreact in its fight against inflation. File picture: Bloomberg Finance

European shares slid in the session to end the week lower on the US data. The Stoxx-600 pan-continent index fell 1%, reversing early gains. The index ended the week 1.4% lower.

“The Fed has much more work to do, and even if they only raise rates a couple more times, it is extremely unlikely that they will be cutting rates this year — as was consensus and in market-based pricing as recently as a few weeks ago,” said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance.

Data earlier in the day from Germany showed Europe’s biggest economy contracted in the fourth quarter of 2022 as inflation and an energy crisis took a toll on household consumption and capital investment.

Still, a GfK institute survey signalled German consumer sentiment is set to improve as energy prices drop. “Every day, there seems to be just enough contradictory economic data to keep us all guessing about exactly which box those central bankers will check when it comes to their next rates meeting,” said Danni Hewson, head of financial analysis at AJ Bell.

Shares in IAG, which owns Aer Lingus and BA, slid 6.5%. It agreed to pay €400m to Spain’s Globalia for the remaining 80% of the Spanish-based Air Europa it did not already own.