European Stocks Drop After Hawkish Federal Reserve Commentary

(Bloomberg) — European stocks fell Thursday after hawkish comments from Federal Reserve officials damped earlier optimism over prospects for interest-rate cuts from the European Central Bank.

The Stoxx 600 Index closed 0.4% lower in London after rising as much as 0.2% earlier in the session. Bond-proxy utilities and renewable stocks were among the few sectors in the green following a clear signal from the ECB that cooling inflation in the region will soon allow it to start policy easing. Banks and travel stocks were among the biggest laggards. 

Federal Reserve Bank of New York President John Williams said that while the US central bank has made “tremendous progress” toward better balance on its inflation and employment goals, there’s no need to cut in the “very near term.”

European shares tracked moves on Wall Street, where stocks failed to hold on to gains as big banks fell ahead of the start of the earnings season, and as traders parsed the latest US inflation data and comments from Fed officials.

The ECB held rates steady for a fifth meeting, while the Governing Council flagged a possible reduction in its accompanying statement for the first time. In later comments, President Christine Lagarde again signaled the prospect of a move in two months’ time.

Investors including Janet Mui, head of market analysis at RBC Brewin Dolphin, think the case for the ECB to cut earlier and faster than the Fed is stronger now. 

Read more: Fed’s Main Inflation Gauge Set to ‘Calm Some Nerves’ After CPI

Investors currently expect the Fed to cut just twice this year, while the Bank of England is seen delivering fewer than two reductions in 2024. The recent recalibration in the outlook for interest rates has weighed on European stocks after a strong first quarter. 

Liberum strategist Joachim Klement said that, while the ECB “provided no surprises today,” it clarified that it sees room for rate cuts should economic forecasts signal space to do so. In his view, the economic outlook for the eurozone is “so weak at the moment that this effectively means a rate cut in June.”

Among individual stock movers, Marks & Spencer Group Plc rose after JPMorgan Chase & Co. raised its recommendation to overweight. VAT Group gained as it reported better-than-expected orders, indicating an early recovery in the Swiss firm’s core semiconductor valves business. Darktrace Plc jumped after the cybersecurity firm raised guidance for a third time in 2024.

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