European stocks extended declines on Monday as markets price the prospects for hawkish interest rate hikes from the Federal Reserve and the Bank of England as inflationary and economic pressure take hold.
The FTSE 100 (^FTSE) dropped 0.9% after the opening bell, France’s CAC (^FCHI) was 1.5% lower on the day and the DAX (^GDAXI) crashed 3.1% in Frankfurt.
London’s bluechip index was dragged lower after the latest economic gauge for Britain’s economy showed gross domestic product (GDP) shrank 0.3% in April.
The figures from the Office for National Statistics reflect the impact of the 54% jump in the energy price cap in April, exacerbating the cost of living crisis for British households as inflation spirals.
April’s contraction means the UK economy is now just 0.9% larger than before the first pandemic lockdown in spring 2020, with services, production and construction all shrinking during the period.
This is the first time that all main sectors have contributed negatively to a monthly GDP estimate since January 2021, according to the ONS.
Monday’s numbers mount pressure on Threadneedle Street as it grapples with surging inflation and slowing growth. The Monetary Policy Committee is expected to raise interest rates by 25 basis points to 1.25% at its meeting on Thursday.
“In the space of a few days, markets have gone from optimism that inflation might be on the cusp of plateauing, to rising apprehension that we could not only see higher prices, but that prices might well remain higher for a lot longer than originally thought,” said Michael Hewson, chief market analyst at CMC Markets.
“This concern has started to manifest itself into the reaction function of central banks, who appear belatedly to have realised that inflation is starting to run out of control, along with consumer expectations of higher prices.”
Read more: UK economy shrinks in April as households struggle against cost of living
Across the Atlantic, US benchmarks posted their worst decline since January after a higher-than-expected inflation print hammered stocks and bond prices, heightening fears the Fed could be forced to take aggressive action to tame surging consumer prices.
Wall Street’s S&P 500 (^GSPC) lost 11.96 points, or 2.9%, to 3900.86. The tech-heavy Nasdaq (^IXIC) plummeted 3.5%, while the Dow Jones (^DJI) declined 2.7% on Friday.
US inflation hit a new 40-year high in May, driven higher by food and energy prices in a worrying sign that price rises have further to run. The consumer price index (CPI) rose to 8.6% in May, ahead of economists’ forecasts of 8.3%.
Separate figures also showed consumer confidence slumped to a record low as surging inflation takes a toll on household finances. The University of Michigan’s preliminary June sentiment index fell to 50.2 from 58.4 in May.
The yield on the two-year note, which tends to climb with investors’ expectations for rate lifts, hit its highest level in more than a decade. The yield on the benchmark 10-year US Treasury note reached the highest since November 2018 on Friday and rose further during Asian trading hours on Monday.
Read more: UK government urged to prioritise business investment to avoid recession
Richard Hunter, head of markets at Interactive Investor, said: “The latest inflation print proved too hot to handle, prompting investors to scramble for cover in anticipation of a more aggressive set of central bank moves.
“As such, the Federal Reserve decision on Wednesday takes on added significance. While investors were relatively comfortable with a likely hike of 0.5%, the fresh inflationary pressure has had some questioning whether a rise of 0.75% could be on the table.
“In turn, this would reignite concerns — which had never been far away — that a newly determined round of aggressive monetary tightening could crimp economic growth, to the extent that the spectre of recession emerges.”
Asian stocks fell sharply overnight as the sell-off in European and US markets extends.
In Tokyo, the Nikkei (^N225) tumbled 3%, while the Hang Seng (^HSI) slumped 3.3% in Hong Kong and the Shanghai Composite (000001.SS) lost 0.9%.
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