# No Santa rally for markets as central banks dampen peak rate hopes
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-12-16
Category: NEWS
Category URL: https://financedigest.com/category/news
Meta Title: Central Banks Deliver Blow to Year-End Rally Amid Inflation Battle
Meta Description: Despite hope for year-end rally, central banks in the US, Eurozone, UK, and Switzerland warn of ongoing efforts to control inflation, impacting financial
URL: https://financedigest.com/no-santa-rally-for-markets-as-central-banks-dampen-peak-rate-hopeshtml

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By Naomi Rovnick and Dhara Ranasinghe

LONDON (Reuters) -Forget a year-end rally in financial markets. The message from major central banks is loud and clear: the battle to tame inflation is far from over.

[Central banks](https://www.financedigest.com/inflation-trumps-financial-risks-as-central-bank-tightening-set-to-continue.html "Inflation trumps financial risks as central bank tightening set to continue") in the United States, euro zone, Britain and Switzerland met on Wednesday and Thursday and all slowed the pace of aggressive rate moves.

But their signalling was not what markets, which have rallied hard in recent weeks on the notion of peak [inflation and peak interest rates](https://www.financedigest.com/uk-inflation-rate-unexpectedly-rises-to-10-4-in-february.html "UK inflation rate unexpectedly rises to 10.4% in February"), wanted to hear.

[European Central Bank](https://www.financedigest.com/dollar-outshines-euro-sterling-amid-european-bank-jitters.html "Dollar outshines euro, sterling amid European bank jitters") President Christine Lagarde said to expect more 50-basis-point rate increases for a period of time and that the ECB was not “pivoting” yet.

It [hiked rates](https://www.financedigest.com/central-banks-keep-hiking-rates-amid-banking-turmoil.html "Central banks keep hiking rates amid banking turmoil") by 50 bps on Thursday after delivering two back-to-back 75 bps moves to tame double-digit inflation.

Government [bond markets](https://www.financedigest.com/us-stock-futures-bonds-rally-as-markets-flirt-with-fed-pause.html "US stock futures, bonds rally as markets flirt with Fed pause") took a beating. As prices slid, the [yields on interest rate-sensitive two-year German](https://www.financedigest.com/german-yields-steady-spreads-tighten-after-recent-repricing.html "German yields steady, spreads tighten after recent repricing") bonds surged 24 bps, their biggest one-day jump since 2008.

Italian borrowing costs were last up almost 30 bps at 4.13%, while [European shares](https://www.financedigest.com/european-shares-hit-nine-month-high-dollar-wobbles-after-powell-remarks.html "European shares hit nine month high, dollar wobbles after Powell remarks") slid nearly 3% and stocks on Wall Street tumbled 2%.

The reaction in [European bond markets](https://www.financedigest.com/explainer-why-european-money-market-funds-inflows-are-lagging-behind-the-u-s-torrent.html "Explainer-Why European money market funds inflows are lagging behind the U.S. torrent?") has been brutal,” said Antoine Lesne, head of EMEA strategy and research for State Street’s SPDR ETF business.

A slight drop in euro area inflation in November, to an annual rate of 10%, had sparked [market speculation that the ECB might pivot away from its fight against soaring](https://www.financedigest.com/hungarys-booming-wedding-market-doused-by-soaring-inflation.html "Hungary’s booming wedding market doused by soaring inflation") prices.

The [market had been getting ahead](https://www.financedigest.com/a-look-ahead-to-2023-in-the-insurance-market.html "A Look Ahead to 2023 in the Insurance Market") of itself about the euro area in the past few weeks … they’re now repricing the fact that the [ECB is going to have to remain hawkish,”](https://www.financedigest.com/hawkish-ecb-comments-push-up-rate-hike-expectations.html "Hawkish ECB comments push up rate-hike expectations") Lesne said.

Ed Hutchings, head of rates at [Aviva Investors](https://www.financedigest.com/aviva-boosts-investor-payouts-after-profit-beat.html "Aviva boosts investor payouts after profit beat"), said he expected peripheral European bonds to “struggle” from here and European bonds in general to be somewhat less supported.

TOO COMPLACENT?

Federal Reserve [chief Jerome Powell meanwhile warned](https://www.financedigest.com/bootmaker-dr-martens-warns-on-profit-as-finance-chief-walks.html "Bootmaker Dr Martens warns on profit as finance chief walks") on Wednesday that recent signs U.S. [inflation may be slowing have not brought any confidence yet that the fight](https://www.financedigest.com/inflation-fighting-central-bankers-air-climate-role-doubts.html "Inflation fighting central bankers air climate role doubts") has been won.

Forget the [Santa rally](https://www.financedigest.com/take-five-ready-for-that-santa-rally.html "Take Five: Ready for that Santa rally?") … the Fed looks more like the Grinch this Christmas,” said John Leiper, CIO of Titan [Asset Management](https://www.financedigest.com/britains-post-brexit-asset-management-revamp-eyes-liquidity-tokenisation.html "Britain’s post-Brexit asset management revamp eyes liquidity, tokenisation").

On Thursday, the S&P 500 fell to its lowest level in a month. On Tuesday, the index had jumped as much as 2.76% to a three-month high as an unexpectedly small rise in consumer price inflation buoyed hopes that the Fed could soon dial [back its rate hikes](https://www.financedigest.com/uks-bellway-to-buy-back-shares-hike-social-housing-output.html "UK’s Bellway to buy back shares, hike social housing output"). The S&P has lost more than 16% this year.

Switzerland’s central bank chief Thomas Jordan also weighed in after a 50 bps hike, [saying it was too early to “sound the all-clear” on inflation](https://www.financedigest.com/boes-bailey-says-rate-setters-can-put-inflation-before-bank-worries.html "BoE’s Bailey says rate-setters can put inflation before bank worries").

It does feel like the major central banks, including the Fed, are having to fight a market narrative of relief that we’ve [hit peak](https://www.financedigest.com/pound-hits-10-month-peak-euro-up-as-dollar-under-pressure.html "Pound hits 10-month peak, euro up as dollar under pressure") rates,” said Hetal Mehta, senior European economist at Legal & General Investment Management.

Recent [data showing inflation in the United States and Europe easing](https://www.financedigest.com/britain-plans-new-data-rules-to-ease-compliance-burden.html "Britain plans new data rules to ease compliance burden") slightly caused bond yields to come off multi-year highs and the S&P 500 to rally over 10% from a low in October.

While U.S. 10-year Treasury yields are still set to end the year up 200 bps, they are down 32 bps in Q4, in what is set to be their biggest quarterly drop [since early](https://www.financedigest.com/first-quarter-dash-for-cash-largest-since-early-2020-bofa.html "First quarter ‘dash for cash’ largest since early 2020 -BofA") 2020\. [German benchmark Bund yields](https://www.financedigest.com/german-bond-yields-rise-after-schnabel-fuels-inflation-worries.html "German bond yields rise after Schnabel fuels inflation worries") are also up 200 bps over 2022 but stand almost 50 bps lower than a multi-year high of 2.5% reached in October.

Such sharp moves loosen the very financial conditions that central [banks are trying to tighten in order to contain inflation](https://www.financedigest.com/bank-of-england-still-needs-to-see-the-job-through-on-inflation-pill.html "Bank of England still needs to ‘see the job through’ on inflation: Pill").

Speaking at Thursday’s post-decision news conference, the ECB’s Lagarde referenced [financing conditions and said further tightening](https://www.financedigest.com/personal-finance-fasten-your-seatbelt-tighten-your-belt-that-rainy-day-is-here.html "Personal Finance: Fasten your seatbelt, tighten your belt, that rainy day is here") was needed.

A [market rally](https://www.financedigest.com/jittery-markets-attempt-risk-on-rally-while-waiting-for-powell.html "Jittery markets attempt risk-on rally while waiting for Powell") would be an easing of financial conditions that jars with the idea that they (policymakers) need to get interest rates into restrictive territory,” said Mehta.

(Reporting by Dhara Ranasinghe and Naomi Rovnick; Editing by Catherine Evans)


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