Stocks slip as officials push back on easing bets
European stocks and bonds retreated after European Central Bank officials poured cold water on expectations for rapid rate cuts even as data from Germany underscored the challenging backdrop for economic growth and corporate profits.
The Stoxx Europe 600 index slipped 0.5%, extending a lackluster start to the year. Consumer goods and retailers led the decline after data showed Germany's economy contracted for the first time since the pandemic last year.
Lingering inflation and geopolitical risks will prevent the ECB from lowering interest rates this year, even though a recession can no longer be ruled out, according to Governing Council member Robert Holzmann. He joined colleagues including ECB President Christine Lagarde, Governing Council member Constantinos Herodotu and Chief Economist Philip Lane in warning that it's too early to talk about trimming borrowing costs.
Traders are betting on six quarter-point cuts from the ECB, starting in April, while economists anticipate a first of four moves in June. Signs of economic weakness in the region support their case: Germany on Monday reported a contraction of 0.3% in the fourth quarter and a decline in output of the same magnitude for the whole of 2023.
Even so, Bundesbank President Joachim Nagel agreed that it's premature to discuss monetary easing, suggesting no movement before the summer.
“We're now getting at the stage when bad economic news no longer translates into good news for equity markets,” said Benoit Péloille, chief investment officer at Natixis Wealth Management. In the US as well, market pricing for as many as six quarter-point rate cuts “can be a stretch; bad economic news will start to hurt,” he said.
U.S. equity-index futures were flat, with stock and Treasury cash markets closed on Monday for a public holiday. A gauge of the dollar edged higher.
Among individual stock moves in Europe, Dassault Aviation SA slumped after the French aircraft maker reported a decline in 2023 jet orders. Delivery Hero SE and Just Eat Takeaway.com NV dropped after BNP Paribas Exane analysts recommended steering clear of Europe's food delivery sector. Volvo Car AB extended a decline sparked Friday when it said it's temporarily halting some production due to shipping delays caused by Red Sea attacks.
The MSCI Asia Pacific share index climbed for a third session. Stocks advanced in Taiwan after the Democratic Progressive Party won the presidential election and the more China-friendly Kuomintang gained too few seats to control the assembly.
China's CSI 300 Index swung between gains and losses amid speculation officials may lower the required reserve ratio after the People's Bank of China unexpectedly left the rate on its one-year policy loans at 2.5% Monday. That was contrary to expectations among economists that it would trim the so-called medium-term lending facility by 10 basis points.
“Rate cuts are likely still on the cards, but China looks to be taking a more measured approach to policy easing,” said Marvin Chen, an analyst at Bloomberg Intelligence in Hong Kong.
Along with more U.S. earnings reports, investors this week will be focused on inflation readings in Germany and the UK, as well as a swath of political leaders and officials including Chinese Premier Li Qiang attending the annual WEF. A speech by Federal Reserve Governor Christopher Waller, after officials last week attempted to temper any expectation of a looming rate cut, will also be closely watched.
In commodities, oil declined as soft fundamentals offset the risk that air strikes by the US and allies against the Houthis would ignite a wider conflict and disrupt crude flows from the Middle East . Meanwhile, European natural gas futures tumbled to the lowest since August, underscoring the region's success in bolstering supplies since the energy crisis in 2022.