Global stock and bond markets fell on Friday after upbeat UK retail sales data bolstered expectations that central banks will move quickly to tighten monetary policy.
Short-term borrowing costs in the UK are expected to post their biggest rise this week in more than a decade, climbing 0.12 percentage points on Friday to 2.57%, up around half a percentage point since the end of last week. Such large moves are unusual in the gilt market, which is generally seen as a safe haven during times of broader market turmoil.
The surge in two-year yields shows how investors bolstered their expectations of a rate hike by the Bank of England after warmer-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 spilled over into other stock, money and bond markets. Yields on short-term debt in Germany and Italy rose by 0.1 and 0.18 percentage points respectively. Meanwhile, the 10-year US Treasury yield – considered a proxy for global borrowing costs – climbed 0.08 percentage points to 2.96%.
The pound fell 0.9% against the dollar to $1.18, while the greenback gained 0.5% against a basket of six currencies. The Chinese 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 lean summer month,” said Kit Juckes, macro strategist at Societe Generale, who suggested the pound could fall 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 no one else has the same trade-off.
In equity markets, futures on Wall Street’s S&P 500 and the tech-heavy Nasdaq 100 fell about 1%. The European Stoxx 600 fell 0.3%. London’s FTSE 100 gained 0.2%.
UK retail sales data on Friday showed a monthly rise of 0.3% in July, much better than a Reuters poll expected for a 0.2% drop.
The data was skewed by a surge 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, figures from the consumer price index this week showing a 10.1% increase in year of inflation. -over the year until July.
“This is where good news becomes bad news,” said Kiran Ganesh, multi-asset strategist at UBS Global Wealth Management. The data that opens the door to big rate hikes also dims the outlook for future economic growth on the premise that bigger increases in borrowing costs will push the UK economy into a deeper recession, he said. added.
“Of all the major economies, the UK is the closest to falling into the bucket of stagflation,” 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 the week. last.
Traders also look to next week, when central bankers gather in Jackson Hole, Wyoming, for the Kansas City Federal Reserve’s annual economic symposium where they will discuss steps to rein in runaway inflation. The Jackson Hole summit is often used as a platform by the Fed, the world’s most influential central bank, to make major announcements about its policy stance.
“The narrative for the past few weeks has been the idea of a Fed pivoting and getting inflation under control,” Ganesh said. “But Fed members pushed back on that and maybe some investors are betting they’ll send a more hawkish message to Jackson Hole.”