European shares and US stock futures were muted on Thursday after minutes from the latest Federal Reserve meeting indicated the central bank would prioritise fighting inflation for an extended period.
In Asia, Hong Kong’s Hang Seng index and Japan’s Topix both fell 0.8 per cent, following European and US share moves in the previous session.
Europe’s Stoxx 600 index traded up 0.1 per cent, while the FTSE lost 0.1 per cent.
Fed officials signalled that restrictive rates would be in place “for some time” in minutes from its July meeting released on Wednesday, delivering a blow to more optimistic investors that it would quickly begin to unwind elevated interest rates as soon as there were signs that raging inflation was easing.
The minutes showed that officials supported raising interest rates to the point where they acted as a drag on economic growth.
In a further sign that central bankers are determined to stamp out inflation, Norway’s central bank increased interest rates by 0.5 percentage points for a consecutive meeting, raising borrowing rates to 1.75 per cent. The Norges Bank also signalled it would raise rates further in September.
Despite some investors talking about “peak inflation” after the US consumer price index steadied in June, “the reality is things are often more complicated,” said Kasper Elmgreen, head of equities at Amundi. “We get very mixed data points but the reality is inflation continues to be way above levels that central banks are comfortable with.”
Disappointing results for US retail bellwether Target and declines for other consumer sectors pulled the blue-chip S&P 500 down 0.7 per cent on Wednesday, while the Nasdaq Composite dropped 1.3 per cent on the back of the Fed minutes and a poor day for tech stocks. Futures contracts tracking the S&P and Nasdaq 100 were flat on Thursday morning.
The Fed minutes and the darkening outlook on inflation in the UK brought an end to a strong few weeks for equity markets.
Short-dated sovereign debt, which is sensitive to interest rate expectations, also continued to sell off in the wake of higher than expected UK consumer price inflation.
Two-year gilt yields gained as much as 0.3 percentage points on Thursday, trading at their highest level since the 2008 financial crash. The large moves ricocheted across other bond markets, with German, Italian and American two-year bonds, which are sensitive to interest rate expectations, all selling off.
In a sign of continued concerns about interest rate rises, yields continued to rise on Thursday. The two-year gilt yield gained 0.03 percentage points to 2.39 per cent. Two-year Bund yields rose by 0.04 percentage points to 0.76, while Italy’s two-year bonds added 0.07 percentage points to trade at 1.67 per cent. Bond yields rise as their prices fall.
Further data, in the form of US weekly jobless claims and home sales data, will provide more information on the state of the world’s largest economy later on Thursday.
The dollar, a haven asset for investors, made small gains against a basket of six other currencies, rising 0.3 per cent.