European Stocks Slip as Fed Rate Cuts Doubts Weigh on Sentiment

European stocks slipped on Friday, as doubts grew over the Federal Reserve’s ability to cut US interest rates in the face of strong economic data.

The Stoxx 600 Index closed 0.2% lower, snapping a two-week run of gains, on expectations the Fed will not cut rates before December. However, it pared an earlier sharp drop after data showed US consumers tempered their inflation expectations in the second half of May, compared with earlier in the month. 

Utilities led declines in Europe, as gas prices snapped their longest rising streak since 2021 and after the UK regulator Ofwat delayed publishing a consultation on its draft price control determinations. Rate-sensitive tech stocks also underperformed. 

Among individual stocks, DS Smith Plc slid amid uncertainty over International Paper Co.’s plan to acquire the UK packaging company. Renault SA gained after UBS analysts upgraded the stock to sell, and TotalEnergies SE edged up as CEO Patrick Pouyanne said his aim is to list the company in both New York and Paris. 

This week’s equity wobble came as Fed policymakers signaled they are in no rush to cut rates. Still, the Stoxx index has gained more than 3% so far this month, buoyed by robust earnings and confidence that interest rates will eventually fall.

“The issue is still the same, it’s the Fed,” said Francois Rimeu, a strategist at La Francaise Asset Management in Paris. “But as long as expectations for the first rate cut are just pushed back by a few months, it doesn’t change the narrative, which is broadly, ‘so far, so good.’” 

Goldman Sachs Group Inc. economists pushed back their call for a July Fed rate cut amid signs the economy is still too resilient to justify easing. Swaps, meanwhile, fully price the Fed’s first full quarter-point rate cut in December, against November earlier this week. 

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Published: 24 May 2024, 11:35 PM IST

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