After week dominated by UK corporate updates and inflation data from the US and UK, concern around the trajectory of interest rates hurt stocks on Friday.
Markets have very quickly priced in a more dovish approach to monetary policy as inflation begins to trend to the downside. However, investors hoping for slower rate hikes were dealt a blow by Federal Reserve members yesterday who suggested the Fed could indeed revert to 50bps rate hikes.
The Federal Reserve has two mandates; to achieve maximum employment and maintain price stability. The Fed has a 2% inflation target and US CPI inflation is currently 6.4%.
Couple this with the bumper 517,000 jobs added to the US economy in January, there is no real justification for slowing interest rates now.
This is at odds with recent moves in equity markets and the FTSE 100 dipped 0.2% to 7,990 in midday trade on Friday.
“It was only days ago that investors seemed confident we would only get one or two more small increases in US interest rates and then the Federal Reserve might start cutting rates later in the year. The rhetoric has now changed,” said Russ Mould, investment director at AJ Bell.
“Two Federal Reserve officials yesterday spoke in favour of a 50 basis-point interest rate hike in March from the US central bank. That took the market aback, sending US shares into reverse, and that negativity extended across Asia and Europe on Friday.”
“A rate hike of this proportion could easily stop this year’s stock rally in its tracks. Investors might have become too complacent, assuming that inflation is going to fall and the Fed will no longer have a reason to stay aggressive on rate hikes.”
Broad declines
The FTSE 100 declines were broad with 65% of constituents trading negatively at the time of writing, although individual losses were relatively benign.
NatWest was by far the biggest faller after raising concerns about their earnings potential in the year ahead. NatWest shares were down 6% at the time of writing and Lloyds shares fell in sympathy.
Segro was the top gainer after the logistics property company said pretax profit increased 8%.