May 24 2024: European stocks retreated on Friday, positioning them for weekly losses as persistent U.S. inflation pressures and a strengthening euro zone economy dampened hopes for multiple interest rate cuts from major central banks this year.
The pan-European STOXX 600 index fell 0.5%, with rate-sensitive tech stocks pulling back after Thursday’s significant gains. The index was on track for a weekly decline of 0.8%.
U.S. Stocks Plunge on Inflation Worries
U.S. stocks closed sharply lower on Thursday. Initial optimism from a positive outlook by chip giant Nvidia (NASDAQ: NVDA) dissipated following economic data that indicated inflation remains a concern, potentially delaying Federal Reserve rate cuts.
“For the Fed, a cut in June has been priced out for a while, but now even September looks quite questionable,” said Joost van Leenders, senior investment strategist at Van Lanschot Kempen. “We still think that [a rate cut] is possible in September and two or three for the whole year. But what the data basically shows is that it’s a very fine line for the Fed to get that soft landing.”
Market Expectations for Rate Cuts
Traders are currently pricing in rate cuts of 37 basis points (bps) from the Fed by the end of the year, according to LSEG’s rate probabilities app, and 57 bps of cuts from the European Central Bank. The odds of these cuts have decreased since the beginning of the year.
European Bond Yields and Economic Outlook
The German two-year bond yield reached its highest point in six months on Thursday after a survey showed euro zone business activity expanded at its fastest pace in a year this month. It traded just below those levels on Friday.
“When you look at Europe, the economy is improving a little bit but not enough to really regenerate inflation. The outlook is a bit more straightforward for those rate cuts,” van Leenders added.
Sector Performance and Key Movements
Europe’s technology shares suffered the most, down 0.9%, followed by declines in utilities and banks.
Renault (EPA: RENA) shares rose 3.7% after the French carmaker announced a share buyback plan and UBS upgraded the stock to “neutral” from “sell.”
Britain’s National Grid (LON: NG) rebounded about 9% after plunging more than 10% on Thursday following its announcement to raise about 7 billion pounds ($8.9 billion).
