European shares dropped to a one-month low as stickier-than expected euro zone inflation numbers justified what is widely expected to be another 50 basis point hike in the European Central Bank’s already-decade highConsumer price inflation in the 20 countries sharing the euro currency eased to 8.5% in February from 8.6% a month earlier on lower energy prices, but still came in above expectations for 8.2% in a Reuters poll of economists.
Stock and bond markets in the past weeks have been driven by different factors, said Kevin Gardiner, global investment strategist at Rothschild & Co. The chief concern in stocks is the expectation of pressured corporate profits, while bonds are sensitive to inflation and rate expectations. “The economic impact of tightening remains a puzzle. Profitability might not be that fragile, at least, not yet,” he said.
“Economic data has surprised to the upside,” said Steven Oh, global head of credit and fixed income at PineBridge Investments. Any unexpected result in the data would drive policymakers to be more aggressive, and that’s reset market expectations, he said. Investors still mostly foresee the Fed raising rates by 25 basis points at its next meeting later this month, but expectations of a larger 50 basis points hike have increased. The probability that the Fed’s policy rate, currently set in the 4.5% to 4.75% range, could peak above 5.5%, stood at 53%, compared with 41.5% on Feb. 28, according to CME Fed tool.