European stocks fell on Friday due to concerns about rising inflation and the possibility of interest rate hikes. The pan-European STOXX 600 index closed down 1%, marking its first weekly decline in three weeks. The banking sector was down 2% in early trade, despite reassurances from policymakers that the system is stable after recent volatility.
The Bank of England hiked its base rate by 25 basis points to 4.25% on Thursday, and the Swiss central bank raised its own benchmark interest rate by 50 basis points3. Both decisions come in the shadow of the U.S. Federal Reserve hiking by 25 basis points. Investors are concerned that the rate hiking cycle is not close to an end, with ECB board member Isabel Schnabel being the latest to stress the need for more tightening.
All eyes are on U.S. consumer prices data for January, which is expected next week and will be crucial in shaping market expectations of future interest rate hikes. The fear of higher interest rates is causing a push and pull in the market. The global rout in stock markets, cryptocurrencies, and other risky assets has gathered pace amid growing concern that out-of-control inflation, rising interest rates, and slowing growth could combine to tip the world into recession. The outlook is worsened by the likelihood of the conflict in Ukraine dragging on and the west’s economic war on Russia leading to even higher energy prices ahead of the northern hemisphere winter. Some economists predict a US recession within the next 12 months due to persistent inflation and the Fed’s pledge to raise rates until the inflation genie is back in the bottle.
How have US stocks been affected by the inflation data?
Inflation data can have an impact on the US stock market. Rising inflation can lead to higher interest rates, which can discourage spending and investing, and lower profits and revenue, hurting stock prices. However, the impact of inflation on the stock market can be complicated and depends on various factors such as the level of inflation and the type of stocks. Value stocks tend to perform better during high inflation periods, while growth stocks tend to be shunned by investors. High inflation periods can inflate earnings reports, but the real rate of return can be lower. Overall, inflation can inject uncertainty into the markets and lead to volatility in the stock market.
