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.
Russ Mould, investment director at AJ Bell, said: “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.
“However, there are signs that some of the inflationary drivers are stickier than previously expected, and the jobs market remains strong. The Fed could argue its monetary tightening has not caused economic distress and so it will stay on its current path of rate hikes.
“In the UK, the latest retail sales figures show that consumers are still spending in the shops in certain areas. Retailer Next saw its share price dip after the ONS figures said clothing stores sales volumes fell by 2.9% in January 2023, following four months of positive growth.
“The FTSE 100 fell back below the 8,000 level as a result of the global market pullback, with NatWest following in Barclays’ footsteps by plummeting on its results. It dragged down Lloyds which reports next week, signalling the market has become nervous about the sector.”