Stocks slide, dollar steady as central banks wage war on inflation

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By Lawrence Delevingne and Amanda Cooper

(Reuters) -Shares fell globally but the dollar and euro remained stable on Thursday, as major central banks hiked interest rates in their final policy decisions of the year, a day after the U.S. Federal Reserve said it expected rates to stay higher for longer.

U.S. retail sales fell more than expected in November, likely payback after surging in the prior month, while the labor market remained tight, with the number of Americans filing for unemployment benefits declining last week.

"Given the speed and pace of hikes this year, the economy is holding in much better than expected, despite softening," Christian Hoffmann, portfolio manager and managing director at Thornburg Investment Management in Santa Fe, said.

Stocks, however, fell, with the Dow Jones Industrial Average slipping 2%, the S&P 500 down 2.14% and the Nasdaq Composite off 2.4%.

In Europe, the Bank of England (BoE) delivered its ninth straight rate rise and the eighth of 2022, saying even though UK inflation has peaked, it believes more increases will be necessary.

The European Central Bank (ECB) also raised rates by half a percentage point, its fourth successive hike, and outlined plans to shrink its bloated balance sheet from March, hoping that higher borrowing costs will finally arrest runaway inflation.

The pound fell by more than 1% against the dollar after the BoE's Monetary Policy Committee voted 6-3 in favour of the half-point rise to 3.50%, highlighting the split among policymakers on how to tackle inflation, wage growth and a slowing economy.

Following the ECB rate hike, the pound was last down about 1.05%.

"The extent of the divisions across the committee is an eye-opener," said Philip Shaw, chief economist at Investec. "While it is normal to see policymakers disagree towards the end of a rate cycle, the split makes it more difficult to predict the extent to which interest rates will rise."

The dollar, which has lost almost 7% in value in the fourth quarter, gained on the hawkish Fed view, up about 0.5%, steering clear of this week's six-month lows.

The euro was also steady, down 0.12%, near Wednesday's more than six-month peak at $1.0695.

Earlier in the day, the Swiss National Bank raised rate by an expected half-point that brought it to a 14-year high of 1%, while the Norwegian central bank raised rates by a quarter-point to 2.75% and indicated it had not finished tightening monetary policy.

European equities tumbled and bond yields rose. The STOXX fell by about 2.7% as heavyweight stocks across sectors sank.

The MSCI All-World index was last down 2.1% and set for a second straight day of declines, after losses on Wall Street the previous day drove the S&P 500 down 0.6%.

Global stocks have still gained 12% this quarter, marking their strongest quarterly performance for two years, based on the assumption that U.S. inflation is subsiding and soon the Fed will indicate it no longer needs to rapidly raise rates.

On Wednesday, the Fed raised the benchmark rate as expected by half a percentage point, down from the recent 75 basis point increases but also projected a terminal rate above 5%, a level not seen since 2007.

Fed Chair Jerome Powell said the central bank would deliver more rate hikes next year even as the economy slips towards a recession, arguing that a higher cost would be paid if the Fed does not get a firmer grip on inflation.

U.S. Treasury yields fell on Thursday, with the yield on 10-year Treasury notes down 5.3 basis points to 3.450% and the 30-year down 6.1 basis points to 3.479%.

"Our main message to investors is to be cautious," James Demmert, chief investment officer at Main Street Research in New York, said.

"The Fed is trying to engineer a soft economic landing that in our view has a high likelihood of failing and causing a recession in 2023."

COMMODITIES DIP

Crude oil gave back some of the previous session's 2.5% rally that was driven by forecasts of a rebound in energy demand next year on the back of China reopening after COVID lockdowns.

China's economy, however, lost more steam in November as factory output slowed and retail sales fell again, hobbled by surging COVID-19 infections.

U.S. crude fell 0.43% to $76.95 per barrel and Brent was at $82.43, down 0.33%.

Gold prices retreated as the dollar strengthened. Spot gold dropped 1.2% to $1,785.33 an ounce, its lowest level in a week.