European markets fall as Sweden underscores rate rise concerns

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European stocks made a cautious start on Thursday as an interest rate increase in Sweden reinforced the message from central bankers this week that global rates might need to rise further to curb inflation.

The pan-European Stoxx 600 was flat while France’s Cac 40 gained 0.1 per cent. The FTSE 100 fell 0.2 per cent in London.

The moves came a day after a host of central bankers at an annual European Central Bank meeting in Portugal indicated that more action might be needed to ease rapid price growth, despite fears of monetary policy tightening inducing an economic slowdown.

Underscoring the trend, the Swedish central bank on Thursday raised its rate by a quarter percentage point to 3.75 per cent as expected.

Attention turned to Germany’s inflation report coming out later in the day, which is expected to show that the rate of price growth in the eurozone’s largest economy rose to 6.3 per cent in June, from 6.1 per cent in the previous month, according to a Reuters poll of economists. 

“Today’s first inflation releases for June from the eurozone will probably confirm what central bankers have been stressing all the while: their job is not done,” said Antoine Bouvet, head of European rates strategy at ING.

The eurozone-wide data published on Friday is expected to show that headline inflation slowed, but the closely watched core figure, which excludes volatile food and energy prices, edged up in a sign that the ECB’s tightening campaign could extend for longer. 

At the ECB meeting this week speakers reiterated that the eurozone benchmark deposit rate interest rates would almost certainly increase at the next meeting in July, above its current 22-year high of 3.5 per cent. 

Meanwhile, contracts tracking Wall Street’s benchmark S&P 500 and those tracking the tech-focused Nasdaq 100 were flat ahead of the New York open. 

Both indices were choppy in the previous session, after Federal Reserve chair Jay Powell repeated that US interest rates would probably go higher, and did not rule out the possibility of two consecutive rises. 

In government bond markets, the yield on the policy-sensitive two-year Treasury added 0.04 percentage points to 4.76 per cent, while the yield on the benchmark 10-year note gained 0.04 percentage points to 3.75 per cent. Bond yields rise as prices fall. 

The dollar, which strengthens when investors expect rates to go up, rose 0.1 per cent against a basket of six peer currencies, reaching its highest level in two weeks. 

In Asia, equities edged lower, with Hong Kong’s Hang Seng index falling 1.4 per cent, while China’s CSI 300 lost 0.5 per cent and Japan’s Topix lost 0.1 per cent.