European shares slip as Fed officials focus on inflation

European equities edged lower on Wednesday after hawkish comments from the US Federal Reserve clouded market expectations that an economic slowdown would prompt central banks to ease back on rate rises.

The Stoxx 600 fell 0.2 per cent in early trading while Germany’s Xetra Dax fell 0.3 per cent and London’s FTSE 100 traded down 0.2 per cent.

The Euro Stoxx banking index, a benchmark for European banking shares, which benefit from higher borrowing costs, rose 0.1 per cent.

Several Fed officials on Tuesday signalled that the US central bank was committed to its aggressive fight against soaring prices, prompting investors to price in more interest rate rises.

San Francisco Fed president Mary Daly said in an interview on LinkedIn that the central bank was “nowhere near” done with its fight to cool inflation, which continues to run at 40-year highs.

In a separate interview, Chicago Fed president Charles Evans said a 0.5 percentage point increase at the next meeting in September would be appropriate. However, he left the door open to a larger 0.75 percentage point rise, which he said “could also be OK”.

These remarks come after the Fed’s meeting last week at which chair Jay Powell suggested it might be appropriate to slow the pace of interest rate increases, prompting a relief rally in markets at the end of last month.

The US dollar index, which measures the currency against six others, traded steadily after its biggest rise in four weeks in the previous session.

“Fed communication is ambiguous, and it’s way too early for [central banks] to reverse course,” Emmanuel Cau, head of European equity strategy at Barclays, said in a note to clients.

The Fed raised its main funds rate by 0.75 percentage points for the second month in a row in July, taking it to a range of 2.25 per cent to 2.5 per cent. Futures markets also now put a 40 per cent chance of another 0.75 percentage point increase at the central bank’s next monetary policy meeting in September.

The annual pace of US consumer price inflation rose to 9.1 per cent in June and sped up to 8.9 per cent in the eurozone in July.

In Asia on Wednesday, equity markets rose after US house speaker Nancy Pelosi arrived in Taiwan and declared “ironclad” support for the democratic nation that China considers to be a breakaway province.

Hong Kong’s Hang Seng index rose 0.5 per cent, recovering from a sell-off in the previous session, while South Korea’s Kospi added 0.9 per cent and the Nikkei 225 in Tokyo rose 0.5 per cent.

In debt markets, the yield on the benchmark 10-year US Treasury note edged 0.02 percentage points lower to 2.72 per cent, still substantially higher than the level of about 2.5 per cent it traded at on Tuesday morning. This key yield, which moves inversely to the price of the debt, underpins global debt costs and equity valuations.

The two-year Treasury yield, which tracks interest rate expectations and stood at near 2.82 per cent on Monday, traded at 3.04 per cent on Wednesday morning.