European stocks decline as Fed officials pay attention to inflation

European stocks On Wednesday, made a little decline as the US Federal Reserve’s hawkish remarks cast doubt on market hopes that a slowing economy would force central banks to scale back rate increases.

Early trading saw a 0.2% decline in the Stoxx 600 index, a 0.3% down in the Xetra Dax in Germany, and a 0.2% decline in the FTSE 100 in London.

The benchmark for European banking shares, which profit from higher borrowing costs, the Euro Stoxx banking index, increased by 0.1%.

Several Fed officials on Tuesday signaled 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.

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The Fed raised the European stocks funds rate by 0.75 percentage points for the second month in a row in July, taking it to a range of 2.25 percent to 2.5 percent. Futures markets also now put a 40 percent 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 percent in June and sped up to 8.9 percent 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 percent, recovering from a sell-off in the previous session, while South Korea’s Kospi added 0.9 percent and the Nikkei 225 in Tokyo rose 0.5 percent.

The yield on the standard 10-year US Treasury note decreased by 0.02 percentage points to 2.72 percent on the debt markets, which is still much higher than the level of roughly 2.5 percent it traded at on Tuesday morning. Global debt costs and equities valuations are supported by this crucial yield, which changes inversely to the price of the debt.

A measure of interest rate expectations, the two-year Treasury yield, which was trading at about 2.82 percent on Monday, is now at 3.04 percent as of Wednesday morning.