European stocks and bonds retreated after European Central Bank officials poured cold water on expectations for rapid rate cuts even as data from Germany underscored the challenging backdrop for economic growth and corporate profits.

The Stoxx Europe 600 index slipped 0.5 per cent at the close, extending a lackluster start to the year. Consumer goods and retailers led the decline after data showed Germany’s economy contracted for the first time since the pandemic last year. Germany’s 10-year yield rose about five basis points to a one-month high.

Lingering inflation and geopolitical risks will prevent the ECB from lowering interest rates this year, even though a recession can no longer be ruled out, according to Governing Council member Robert Holzmann. He joined colleagues including ECB President Christine Lagarde, Governing Council member Constantinos Herodotu and Chief Economist Philip Lane in warning that it’s too early to talk about trimming borrowing costs.

Traders are betting on six quarter-point cuts from the ECB, starting in April, while economists anticipate a first of four moves in June. Signs of economic weakness in the region support their case: Germany on Monday reported a contraction of 0.3 per cent in the fourth quarter and a decline in output of the same magnitude for the whole of 2023. Even so, Bundesbank President Joachim Nagel agreed that it’s premature to discuss monetary easing, suggesting no movement before the summer.

“We’re now getting at the stage when bad economic news no longer translates into good news for equity markets,” said Benoit Péloille, chief investment officer at Natixis Wealth Management. In the U.S. as well, market pricing for as many as six quarter-point rate cuts “can be a stretch; bad economic news will start to hurt,” he said.

U.S. equity-index futures were flat, with stock and Treasury cash markets closed on Monday for a public holiday. A gauge of the dollar edged higher.

Among individual stock moves in Europe, Dassault Aviation SA slumped after the French aircraft maker reported a decline in 2023 jet orders. Delivery Hero SE and Just Eat NV dropped after BNP Paribas Exane analysts recommended steering clear of Europe’s food delivery sector. Volvo Car AB extended a decline sparked Friday when it said it’s temporarily halting some production due to shipping delays caused by Red Sea attacks.

Oil declined despite a Houthi attack on a U.S.-owned commercial vessel as soft fundamentals offset the risk that air strikes by the US and allies would ignite a wider conflict and disrupt crude flows from the Middle East. Meanwhile, European natural gas futures tumbled to the lowest since August, underscoring the region’s success in bolstering supplies since the energy crisis in 2022.

The MSCI Asia Pacific share index climbed for a third session. Stocks advanced in Taiwan after the Democratic Progressive Party won the presidential election and the more China-friendly Kuomintang gained too few seats to control the assembly.

China’s CSI 300 Index swung between gains and losses amid speculation officials may lower the required reserve ratio after the People’s Bank of China unexpectedly left the rate on its one-year policy loans at 2.5 per cent Monday. That was contrary to expectations among economists that it would trim the so-called medium-term lending facility by 10 basis points.

“Rate cuts are likely still on the cards, but China looks to be taking a more measured approach to policy easing,” said Marvin Chen, an analyst at Bloomberg Intelligence in Hong Kong.

Along with more U.S. earnings reports, investors this week will be focused on inflation readings in Germany and the U.K., as well as a swath of political leaders and officials including Chinese Premier Li Qiang attending the annual WEF. A speech by Federal Reserve Governor Christopher Waller, after officials last week attempted to temper any expectation of a looming rate cut, will also be closely watched.

Some key events in markets this week:

  • World Economic Forum in Davos begins, with this year’s theme “Rebuilding Trust,” Monday
  • Iowa Republican caucuses, the first nominating contests for the 2024 US presidential election, Monday
  • Japan PPI, Tuesday
  • Germany CPI, ZEW survey expectations, Tuesday
  • U.K. unemployment, Tuesday
  • U.S. Empire Manufacturing, Tuesday
  • Goldman Sachs Group Inc., Morgan Stanley to report earnings, Tuesday
  • Federal Reserve Governor Christopher Waller speaks, Tuesday
  • China GDP, property prices, retail sales and industrial production, Wednesday
  • Eurozone CPI, Wednesday
  • U.K. CPI, Wednesday
  • U.S. retail sales, industrial production, business inventories, Wednesday
  • Federal Reserve issues Beige Book survey, Wednesday
  • European Central Bank President Christine Lagarde speaks at Davos, Wednesday
  • New York Fed President John Williams speaks, Wednesday
  • Australia unemployment, Thursday
  • Japan industrial production, Thursday
  • European Central Bank publishes account of December policy meeting, Thursday
  • U.S. housing starts, initial jobless claims, Thursday
  • Atlanta Fed President Raphael Bostic speaks, Thursday
  • Japan CPI, Friday
  • U.S. existing home sales, University of Michigan consumer sentiment, Friday
  • U.S. Congress faces deadline to pass spending agreement before part of federal government shuts down, Friday
  • San Francisco Fed President Mary Daly speaks, Friday

Here are some of the main moves in markets: 


  • S&P 500 futures were little changed as of 2:09 p.m. New York time
  • Futures on the Dow Jones Industrial Average were little changed
  • The MSCI World index fell 0.1 per cent
  • The MSCI Asia Pacific Index gained 0.1 per cent
  • The MSCI Emerging Markets Index fell 0.1 per cent
  • S&P/BMV IPC fell 0.1 per cent
  • Ibovespa Brasil Sao Paulo Stock Exchange Index rose 0.1 per cent


  • The Bloomberg Dollar Spot Index rose 0.2 per cent, more than any closing gain since Jan. 9
  • The euro was unchanged at US$1.0951
  • The British pound fell 0.2 per cent to $1.2729
  • The Japanese yen fell 0.6 per cent to 145.79 per dollar
  • The offshore yuan was little changed at 7.1822 per dollar
  • The Mexican peso fell 0.1 per cent to 16.8886
  • The Brazilian real weakened 0.2 per cent to 4.8628 per dollar


  • Bitcoin rose 1.1 per cent to $42,982.07
  • Ether rose 0.6 per cent to $2,539.80


  • The yield on 10-year Treasuries was little changed at 3.94 per cent
  • Germany’s 10-year yield advanced five basis points to 2.23 per cent
  • Britain’s 10-year yield was little changed at 3.80 per cent


  • West Texas Intermediate crude fell 0.2 per cent to $72.51 a barrel
  • Spot gold rose 0.3 per cent to $2,054.24 an ounce