High US inflation deals a blow to odds of early rate cuts on both sides of Atlantic 

Global shares fell sharply on prospects of delayed cuts by the Federal Reserve and ECB

Analysts scramble to understand whether the US inflation reading will also delay rate cuts by the ECB on this side of the Atlantic

A stubbornly high reading for US inflation sent global stock markets into a spin, as investors assessed the prospects for delayed rate cuts by the US Federal Reserve, as well as the European Central Bank (ECB) on this side of the Atlantic.

The pan-European Stoxx 600 index fell 1% with interest rate-sensitive property shares among the companies that were hit hardest.

In Ireland, shares in the housebuilders Cairn Homes and Glenveagh Properties declined, while PTSB shares fell by almost 2.5%. 

The higher-than-expected US consumer price inflation readout “provoked a sell-off in global equities as rate cut expectations are pushed back”, said Axel Rudolph, senior market analyst at online broker IG.

The implied cost of eurozone governments borrowing fresh funds from debt markets also rose sharply as traders cut back on their bets for early rate cuts on both sides of the Atlantic. Analysts scrambled to understand the implications for inflation around the world and for when the European Central Bank starts to cut interest rates, after it began aggressively to increase rates in July 2022. 

The January inflation reading was a reminder that inflation is a difficult, not-well-understood problem that doesn’t move in a straight line, according to Chris Zaccarelli at Independent Advisor Alliance.

Capital Economics chief North America economist Paul Ashworth said the unexpectedly strong increase in US core consumer prices last month “will feed the ‘last mile is the hardest’ narrative” surrounding the battle of inflation and central banks. ECB chief economist Philip Lane said in an interview on Tuesday that inflation in the eurozone is showing the right downwards path but reiterated any rate cuts will depend on incoming data. 

“We are going in the right direction, but I think we need to make more progress and get a little bit closer to our goal,” Mr Lane told Spanish national broadcaster TVE. 

In an interview with the Irish Examiner this month when asked about the decision-making at the Fed over the potential for a US rate cut, Central Bank governor Gabriel Makhlouf said the US central bank has a slightly different mandate and that  comparing the ECB with the Fed was too simple a comparison to make. Financial traders have now all but abandoned expectations for a Fed cut before July, following the the US inflation report.

The odds of a May US rate cut dropped to about 36% from about 64% before the inflation data, with fewer than a cut of 1% anticipated this year. Meanwhile, crude oil prices rose for its seventh straight day of gains “as investors mull over the situation in the Middle East and supply concerns”, said Mr Rudolph at IG. 

There was better news for European wholesale gas prices. 

The price of wholesale gas fell on futures market to a fresh two-year low at €27.40 per megawatt hour. Prices also fell for delivery through the summer. That implies that Irish household and business bills should fall further, if the drop in wholesale prices is passed on to consumers. 

Prices had spiked to a record level of €238 in late August 2022 on fears about supplies to Europe.

• Additional reporting Bloomberg