European shares fell on Wednesday as traders awaited testimony from the Federal Reserve chair before Congress, while higher-than-expected UK inflation reinforced the view that the Bank of England will extend its tightening policy.
Europe’s Stoxx 600 fell 0.2% after two days of losses, while France’s Cac 40 fell 0.2% and Germany’s Dax was flat.
The move came after official data showed that annual U.K. consumer price inflation held at 8.7% in May, well above analysts’ expectations of 8.4%, increasing the chances of further interest rate hikes by Bank of England policymakers.
Core inflation, which strips out volatile food and energy prices, rose again to 7.1% in May from 6.8% the previous month.
Futures market traders are now betting that Bank of England policymakers will raise interest rates by at least 0.25% from the current 4.5% when they meet on Thursday, with rates expected to peak at 6% by the end of the year.
“The May result was hotter than expected, suggesting that the fight against inflation is far from over, especially given sky-high food bills and rising core inflation,” said Suren Thiru, economic director at accounting body ICAEW.
The two-year gilt yield, which is sensitive to interest rate changes, rose 0.12 percentage point to 5.06%, while the benchmark 10-year yield rose 0.07 percentage point to 4.4%. Bond yields rise as prices fall.
Sterling rose 0.3 percent to trade at $1.28 after the announcement before easing back to $1.27.
London’s FTSE fell 0.6 percent, led by property stocks 2.2 percent lower, as “higher interest rate expectations push up monthly mortgage repayments, which will lead to slower transaction activity and house prices this year,” said Tom Knight Frank UK Residential Research Director Bill.
Meanwhile, contracts tracking Wall Street’s benchmark S&P 500 and the tech-heavy Nasdaq 100 both fell 0.1% ahead of the New York open.
Investors were awaiting Federal Reserve Chairman Jay Powell’s semi-annual testimony before the House Financial Services Committee later in the day, hoping to gauge his stance on future U.S. monetary policy.
The Fed last week opted to keep its benchmark federal funds rate unchanged in its target range of 5% to 5.25%, but signaled two more rate hikes are possible later this year.
Markets are pricing in a 76 percent chance the Fed will raise rates next month, according to data compiled by Refinitiv based on prices in interest rate derivatives.
Asian shares were lower, with China’s benchmark CSI 300 stock index down 1.5%, while the Hang Seng China Enterprises Index of Hong Kong-listed mainland companies fell 1.8%.