European equities retreated from their previous gains as the Federal Reserve’s hawkish interest rate projections overshadowed optimism sparked by softer US inflation data. The Stoxx 600 index fell 0.6%, reversing its earlier advance of 1.1%, the largest in a month.
In contrast, US stocks were poised to extend record highs, with the S&P 500 and Nasdaq 100 futures trading slightly higher. The dollar and Treasury yields were little changed, as investors digested the Fed’s updated rate path.
The European Union’s bonds also declined after MSCI Inc. decided not to include the bloc’s debt in its government bond indexes, a move that could reduce demand for EU bonds.
Earlier, a report showed the US core consumer price index fell to its lowest level in over three years, boosting risk-on assets. However, the Fed’s dot plot revealed a more hawkish stance, with only one quarter-point rate cut expected this year, down from three predicted in March.
According to Mohit Kumar, chief economist for Europe at Jefferies International, “The Fed dot plot was marginally on the hawkish side, causing some pullback in the markets.” He added that any selloff in stocks would be a buying opportunity.
European Central Bank Governing Council member Joachim Nagel also warned that consumer price growth in the euro zone remains stubborn, adding to the cautious sentiment.
In Essence
European stocks retreated as the Fed’s hawkish rate path offset optimism from softer US inflation data. While US stocks were set to extend record highs, European bonds fell, and the dollar and Treasuries were little changed. The Fed’s updated rate path and Nagel’s comments added to the caution, suggesting a bumpy road ahead for markets.
