Traders were positioning for busy week of central bank meetings on Monday as the FTSE 100 slipped 0.3% to 7,448 shortly after lunch.
Markets were bracing for interest rate decisions from the Federal Reserve on Wednesday, and the ECB and Bank of England on Thursday.
The announcements will mark the end of a year punctuated by soaring inflation and a central bank response that has threatened the health of the global economy.
“Caution is in the air in financial markets ahead of a series of crunch central bank meetings around the world this week, with yet more interest rate hikes set to be unwrapped as inflation remains stubborn,” said Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown.
The Federal Reserve is expected to hike rates 50 bps to 4.5% which would represent a step back from the 75 bps hike last time round.
Economists predict the Bank of England will raise rates by 50 bps to 3.5% and the consensus also points to a 50 bps hike by the ECB.
2023 Interest Rates
Higher rates are largely priced into markets and investors will focus on the accompanying statements and press conferences for further insight into how central banks plan to adjust rates in the early months of 2023.
Recent comments from the Fed suggest a pivot could be around the corner. Indeed, if they are to hike by 50 bps, it would mark a slowing in pace of rate hikes.
The economic backdrop in the US is still not at a point that would warrant keeping rates as they are, given the persistently high level of inflation.
The Bank of England will have to take into consideration a 0.3% GDP contraction between July and October, despite a better than expected 0.5% increase in October.
“October’s bounce back was expected, and the fact the growth was a little more enthusiastic than economists had anticipated is welcome. But this is just an aside – the story is unchanged, the economy is still shrinking and recession feels inevitable,” said Danni Hewson, AJ Bell financial analyst.
The threat of a downturn was evident in the FTSE 100’s consumer-facing stocks with JD Sports, Sainsbury’s, Ocado and Kingfisher among the top fallers.
Hiousebuilders were also weaker, as were global cyclical sectors such as the miners and oil majors.