European shares fall as rate hike bets keep investors cautious

By Elizabeth Howcroft

LONDON (Reuters) – European shares fell on Thursday and the safe-haven dollar rose after the latest red-hot U.S. inflation reading increased investor fears about Federal Reserve rate hikes and a possible recession.

Wednesday’s data showed U.S. consumer prices jumped 9.1% year-on-year in June, up from May’s 8.6% rise.

The data was seen as firming the case for the Federal Reserve to raise rates aggressively. Policymakers might consider a 100 basis point increase at the July meeting, Atlanta Federal Reserve Bank President Raphael Bostic said.

By early European trading, money markets were pricing in a 54% chance of a full percentage point hike at the July meeting and a 46% chance of a 75 basis point rise.

By 1106 GMT, Europe’s STOXX 600 index was down 1% at an 8-day low. London’s FTSE 100 was down 0.9%.

The selling looked set to continue on Wall Street, with S&P 500 futures down 1.3% and Nasdaq futures down 1%.

“The Fed probably needs to temper people’s expectations in terms of what they can do,” said Eddie Cheng, head of international multi-asset investment at Allspring Global Investments.

“In the past hiking cycle, we have observed that inflation kept rising during the hiking cycle. … It takes time for the monetary policy to affect inflation.”

Cheng said that riskier assets will be the “collateral damage” in the Fed’s attempts to reign in inflation.

American’s biggest bank, JPMorgan Chase & Co reported a fall in second-quarter profit. Chief executive Jamie Dimon warned that geopolitical tension, high inflation, waning consumer confidence, the never-before-seen quantitative tightening and the war in Ukraine “are very likely to have negative consequences on the global economy sometime down the road”.

The dollar index was up 0.4% at 108.7, while the dollar was up 1.3% against the yen, at its strongest since 1998.

The British pound was down 0.5% at $1.1832. In the first vote to choose who will succeed Boris Johnson as Conservative party leader, former finance minister Rishi Sunak won the biggest backing from Conservative lawmakers.

The euro was down 0.5% at $1.001, having slipped below parity on Wednesday for the first time since 2002.

The euro has been under pressure because of the European Central Bank lagging the Fed in ending its ultra-easy monetary policy of the past decade, as well as the economic risks from the euro zone’s dependence on Russian gas.

The European Commission cut its forecasts for euro zone economic growth for this year and revised up its estimates for inflation.

Germany’s benchmark 10-year government bond yield was up 7 basis points at 1.219%.

Italian yields rose sharply ahead of a parliamentary confidence vote which risks bringing the country’s government down.

The U.S. 10-year yield was up around 6 basis points at 2.9614%. The 2-year, 10-year part of the Treasury yield curve is the most inverted it has been at any point in this cycle, according to Deutsche Bank.

Yield curve inversion – which is when short-dated interest rates are higher than longer-dated ones – is commonly seen as an indicator that markets are anticipating a recession.

Oil prices fell as traders saw a large U.S. rate hike possibly reducing crude demand.

Overnight, the Monetary Authority of Singapore and the Bangko Sentral ng Pilipinas surprised markets by tightening monetary policy in off cycle moves.

GRAPHIC: Hiking interest rates https://fingfx.thomsonreuters.com/gfx/mkt/dwvkrbaorpm/Pasted%20image%201657729191897.png

(Reporting by Elizabeth Howcroft; Editing by Tomasz Janowski, Kirsten Donovan)