Central banks, earnings dampen stock markets’ upbeat mood

World stocks pulled further away from 2-1/2 week highs touched earlier this week, with sentiment dampened by expectations for further rate hikes from big central banks, and with the focus fixed on the earnings season.

The pan-European STOXX 600 index, which hit 14-month highs on Tuesday, was down a third of a percent in early trade, while U.S. stock futures were broadly weaker in a bearish sign for the Wall Street open.

In Asia, Tokyo’s blue-chip Nikkei index edged up, but shares outside Japan slipped for a third straight day. All this left the MSCI World Stock Index a touch softer on the day and down from Tuesday’s 2-1/2 week peaks .

A note of caution set in after British inflation data on Wednesday -- showing inflation in the UK remains in double digits -- suggested the Bank of England and other big central banks may have to continue prioritising price stability over supporting economic growth.

Federal Reserve Bank of New York President John Williams said on Wednesday that inflation is still at problematic levels and the US central bank will act to lower it, in comments that noted recent stress in the banking sector will likely weigh on economic activity.

“What we saw yesterday, and is likely to linger for a while, is that the UK inflation data was a clear reminder to everyone that while we’re near the end of the tightening cycle globally we’re not there yet,” said Seema Shah, chief strategist at asset manager Principal Global Investors.

“That has weighed on sentiment. We’re also deep into earnings season now. The weak earnings growth, which is expected, is bringing to the forefront that not only are central banks still tightening but economic growth is disappointing and now weighing on company profits.”

A Reuters poll of economists showed the Fed is likely to deliver a final 25-basis-point rate increase in May and then hold rates steady for the rest of the year.

A 6% slide in Tesla shares in after-hours trading after the electric vehicle maker posted its lowest quarterly gross margin in two years also dampened the mood in stock markets.

Elon Musk doubled down on the price war he started at the end of last year, saying Tesla would prioritise sales growth ahead of profit margins in a weak economy.

In China, stocks fell on Thursday as data this week suggested the country’s reopening from COVID lockdowns was not translating into a smooth economic recovery. China’s blue-chip CSI 300 Index closed down 0.3%, while the Shanghai Composite Index eased 0.1%. Hong Kong’s Hang Seng index closed 0.1% higher.

World stock markets have bounced back from sharp falls in March as banking sector strain roiled investors, who bet the turmoil would mean global rate hikes would soon end. Signs that rates are likely to remain higher for longer could temper sentiment, however.

“Global central banks’ narrow focus on combating inflation has gotten more complicated as they are now faced with the added task of maintaining financial stability,” said Thomas Poullaouec, head of multi-asset solutions APAC at T. Rowe Price.

Government bond yields, which rose sharply on Wednesday as rate hikes expectations moved higher again, pulled back.

Benchmark 10-year Treasury yields were down 4 basis points (bps) at 3.56% after scaling a four-week peak of 3.639% on Wednesday.

The two-year US Treasury yield, which typically moves in step with interest rate expectations, fell almost 6 bps to 4.21%, having hit almost 4.29% on Wednesday, the highest since March 15.

Shah at Principal Global Investors said she expected two-year yields to move higher but not as high as the 5% levels reached in March just before the banking turmoil.

In currency markets, the US dollar index, drifted lower, with the euro up 0.12% to $1.0969.

The yen weakened 0.1% to 134.56 per dollar, while sterling was last trading at $1.2444, little changed on the day.

Elsewhere, Australia’s central bank will get a new specialist board to manage monetary policy that will be chaired by the governor but have independent expert members with more power over the setting of interest rates.

 Oil prices fell to their lowest in about three weeks on Thursday, depressed by a firmer dollar and rate hike expectations which outweighed lower U.S. crude stocks.

Brent crude futures were down $1.13, or 1.4%, to trade at $81.99 a barrel at 1141 GMT. West Texas Intermediate crude (WTI) futures dropped $1.04, or 1.3%, to $78.12 a barrel.

Both benchmarks, following a 2% fall on Wednesday, are at their lowest since late March, just before a surprise OPEC+ production cut announcement, although not all gains from that move have been wiped out yet.

Equities markets, which often move in tandem with oil prices, pulled away from multi-week highs and the U.S. dollar index has moved up around 0.3% this week so far, on course for its strongest week since late February.

A strengthening greenback makes oil more expensive for holders of other currencies.

U.S. economic activity was little changed in recent weeks, according to a Federal Reserve report.

Agencies