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European shares slip as Fed officials focus on inflation

European equities slipped in morning trade on Wednesday after hawkish comments from the Federal Reserve clouded market hopes that the US central bank would ease the pace of rate rises to counter an economic slowdown.

The Stoxx 600 slipped 0.1 per cent in morning trading, with London’s FTSE 100 up 0.2 per cent and Germany’s Dax trading flat.

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

Meanwhile, an influential survey of eurozone executives found that business activity in the currency bloc hit a 17-month low in July, putting pressure on European government bonds.

Germany’s 10-year Bund yield rose 0.08 percentage points to 0.8 per cent as the price of the debt fell. Italy’s equivalent bond yield added 0.07 percentage points to 2.99 per cent.

San Francisco Fed president Mary Daly said in an interview on LinkedIn on Tuesday 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 0.75 percentage point rise in September “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.

“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 two-year Treasury yield, which tracks interest rate expectations and stood at near 2.82 per cent on Monday, traded at 3.07 per cent on Wednesday morning.

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.

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.

S&P Global’s eurozone composite purchasing managers’ index for the eurozone produced a reading of 49.9 for July, falling below the level of 50 that separates expansion from contraction for the first time since February 2021.

Business confidence in the eurozone also dropped to its weakest level since the initial outbreak of Covid-19 in the first half of 2020, the survey compilers said on Wednesday, citing “high price pressures” and energy security concerns from Russia reducing gas supplies to the continent.

In Asia on Wednesday, equity markets rose after US House of Representatives Speaker Nancy Pelosi visited Taiwan and declared “ironclad” support for the island nation that China considers a breakaway province.

Hong Kong’s Hang Seng index rose 0.5 per cent, recovering from a sell-off in the previous session. Tokyo’s Nikkei 225 gained 0.5 per cent.

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