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European stocks slide as Fed damps hopes of interest rate cuts in 2023

European stocks and US futures slipped on Thursday, a day after minutes from the Federal Reserve’s December meeting revealed none of the central bank’s officials anticipated cutting interest rates this year.

The regional Stoxx Europe 600 fell 0.4 per cent, though the index has climbed more than 3 per cent this week, while London’s FTSE 100 was steady. Contracts tracking Wall Street’s benchmark S&P 500 fell 0.2 per cent and those tracking the tech-heavy Nasdaq 100 lost 0.3 per cent.

The S&P 500 rose 13 per cent between mid-October and the start of December as inflation in the world’s biggest economy showed signs of slowing. The index has fallen about 5.5 per cent since then, however, on the back of hawkish comments from Fed officials, many of whom warned that price growth remains too high to justify lowering borrowing costs in 2023.

Minutes from the Federal Open Market Committee’s most recent meeting crystallised those hints, dealing a blow to traders unconvinced that the Fed will hold interest rates at around 5 per cent to drag inflation back down to target.

The latest minutes show “no participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023”, with officials observing that “a restrictive policy stance would need to be maintained” until economic data “provided confidence that inflation was on a sustained downward path to 2 per cent, which was likely to take some time”.

Lee Hardman, senior currency analyst at MUFG bank, said the comments, which were later reinforced by senior IMF official Gita Gopinath, “set a high hurdle for the Fed to pause [or] bring an end to their hiking cycle in the near-term”, though he noted that markets remain “sceptical that the Fed will have to raise rates above 5 per cent as planned”.

In Asia, Hong Kong’s Hang Seng index added a further 1.2 per cent, taking its gains since the start of November to about 43 per cent. “Given past divergence [with US indices] and positioning, there’s probably room for more gains,” said Mitul Kotecha, head of emerging markets strategy at TD Securities, “but with global equity markets stuttering amid earnings and growth worries, it is questionable how far the Hang Seng can deviate from the global trend”.

China’s CSI 300 index of Shanghai- and Shenzhen-listed stocks added 1.9 per cent, having risen 13 per cent since the start of November even as the country battles unprecedented outbreaks of Covid-19.

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