by Diana Mandia

(Reuters) – European stock markets ended lower on Wednesday, hit by the prospect of persistent inflation from the European Central Bank (ECB), raising fears of a further rise in interest rates on Thursday.

In Paris, the CAC 40 ended down 0.42% at 7,222.57 points. The British Footsie lost 0.02% and the German Dax 0.39%.

The EuroStoxx 50 index dropped 0.37%, the FTSEurofirst 300 0.25% and the Stoxx 600 0.23%.

While the European Central Bank (ECB) began a meeting on Wednesday which should culminate in a decision on rates on Thursday, Frankfurt’s quarterly inflation forecasts for the euro zone, which according to sources should remain above 3% per year next month, lean in favor of a further increase in the cost of credit this month, a scenario which seemed improbable just a few days ago.

The probability that the ECB will raise rates by 25 basis points on Thursday is currently 65%, compared to around 40% on Monday and only 25% a week ago, according to traders.

This would be the tenth consecutive rate increase in the euro zone to combat persistent inflation, which remains well above the 2% target set by the monetary institution.

Investors also learned on Wednesday that the American consumer price index (CPI) experienced its strongest increase in more than a year in August (+0.6%), due in particular to the increase in the cost gasoline, but the increase in the basic price index, which excludes food products and energy, slowed to 4.3% in August year-on-year, after 4.7% in July.

Despite the persistence of inflation, these data, widely anticipated, support forecasts according to which the Federal Reserve (Fed) will leave its interest rates unchanged next Wednesday.

Inflationary pressures further intensified due to concerns over oil supply, as the International Energy Agency (IEA) warned on Wednesday that the extension of voluntary production cuts would lead to a market deficit during the fourth trimester.

VALUES

In Paris, the car manufacturer Renault ended with a gain of 2% and following the announcement of the opening by the European Commission of an investigation into the subsidies granted by China to its manufacturers of electric vehicles, which allow prices to be reduced on the European market.

Alstom lost 3.8%, at the bottom of the CAC 40 index, Barclays having started monitoring the stock with an “underweight” recommendation.

In Madrid, Inditex, the owner of the fashion brand Zara, fell 0.5%, the group’s warning on currency effects taking precedence over the 40% jump in half-year profit. The European distribution sector, for its part, lost 0.85%.

The Danish wind turbine manufacturer Vestas took 5.3%, taking advantage of the commitment made by the President of the European Commission, Ursula von der Leyen, in her annual speech to the European Parliament, to further support the wind energy industry.

A WALL STREET

At closing time in Europe, Wall Street the Dow Jones gained 0.16%, the Standard & Poor’s 500 0.23% and the Nasdaq Composite 0.32%, with inflation data reinforcing expectations of a status quo on Fed rates.

TODAY’S INDICATORS

Euro zone industrial production fell much more than expected in July, supporting the European Commission’s downgraded economic growth forecast for the bloc this year.

Outside the euro zone, the British economy contracted sharply in July, official data showed on Wednesday, as the Bank of England (BoE) is due to make a decision on interest rates at its meeting from September 22.

CHANGES

Data on inflation in the United States, which seem to leave the door open to further rate hikes from the Fed after the expected break next week, gave way to a stable dollar (+0.01%) against a basket of reference currencies, while the euro EUR= lost 0.2% to 1.073 dollars.

RATE

Euro zone bond yields rose on Wednesday after Reuters reported that the ECB expected inflation above 3% next year, raising the likelihood of a rate hike on Thursday.

The German ten-year thus gained a little more than a basis point to 2.654%, and that of the two-year rate, more sensitive to rates, advanced more than 4 to 3.17%. The yield on the 10-year Italian bond reached its highest level since mid-March during the session, ending with a gain of more than 5 bp at 4.458%.

The American bond markets are almost unchanged after the inflation figures: the yield on ten-year Treasuries stands at 4.27% and that on two years at 5.00%.

OIL

Oil prices hit their highest level in 10 months on Wednesday, as a surprise rise in crude stocks in the United States failed to allay fears of tight supply for the rest of the year.

U.S. crude inventories rose by 4 million barrels last week to 420.6 million barrels, while analysts polled by Reuters had forecast a decline of 1.9 million barrels.

Brent rose 0.25% to $92.29 per barrel, with American light crude (West Texas Intermediate, WTI) increasing 0.26% to $89.07 CLc1.

TO BE CONTINUED THURSDAY:

(Some data may have a slight lag)

(Writing by Diana Mandiá, editing by Zhifan Liu)

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