Europe close: Shares lower as 'sticky' inflation raises rate hike fears

European shares closed lower on Thursday despite eurozone and US inflation rising more than expected, raising fears of more interest rate rises.

The pan-regional Stoxx 600 index finished at 458.19, down 0.20%. Germany's DAX outperformed with a 0.35% rise despite July retail sales data falling and missing estimates of a rise.

In the US, consumer spending rose more than expected and inflation picked up in July, according to the Bureau of Economic Analysis, which will likely raise more concerns that the Federal Reserve's strategy of raising interest rates is doing little to stop an overheating economy.

Personal consumption expenditures in current dollar terms rose 0.8% in July, picking up from a revised 0.6% increase seen in June. The initial estimate for June was +0.5%.

Thursday's reading will be a negative surprise to many economists who had expected spending growth to come in at 0.6%.

Meanwhile, the PCE price index, the Fed's favoured gauge of inflation, rose by 3.3% year-on-year, accelerating from 3% in June. The core PCE price index, which strips out volatile items like food and energy, picked up to 4.2%, from 4.1%.

The data will do little to settle concerns about the recent stickiness of inflation and its impact on future monetary policy. Just last week, Fed chair Jerome Powell said that inflation "remains too high".

EQUITIES IN FAVOUR BUT RISING OIL PRICE A CONCERN

"Today’s US inflation data has provided investors with a reason to keep buying stocks, but oil’s renewed rise poses a problem for the future, says Chris Beauchamp, chief market analyst at online trading platform IG.

“While today’s PCE data wasn’t lower than expected, the in-line readings were enough to put stocks on the front foot as the end of August loomed. While rate cuts are clearly off the table, the prospect of getting to the end of the year without any more US hikes has spurred fresh buying in equities."

“There is a spectre at the feast, however. While investors are more confident about the global outlook, this means they are more optimistic on oil demand too. The commodity has climbed over the last week, and leaves open the possibility of a revival in inflation later in the year. Higher prices and a return to rate hikes could yet spell major trouble for the rally in stocks.”

Back on the Continent, consumer prices in the eurozone area increased more than expected in August, raising concerns that the European Central Bank may act once again to bring down stubbornly high inflation with another interest-rate rise.

Just two weeks ahead of the ECB's next policy meeting on 14 September, Eurostat announced that the consumer price index increased 5.3% on last August, in line with July's reading but ahead of the 5.1% level expected by economists.

In Germany, retail sales fell by 0.8% month-to-month in July, missing forecasts of a 0.3% increase. On an annual basis, sales fell 2.2%, from a 1.6% decline in June, and below the consensus estimate of a 1.0% decrease.

Meanwhile in China, factory activity contracted in August for the fifth month in a row. The official manufacturing purchasing managers' index rose to 49.7 from 49.3 in July, remaining below the 50.0 mark that separates contraction from expansion. Economists were expecting a reading of 49.2.

Meanwhile, the non-manufacturing PMI declined to 51.0 in August from 51.5 in July, versus consensus expectations of 51.2.

In equity news, Swiss banking giant UBS gained after delivering a record bottom line in its second quarter after booking a $29bn accounting gain from its takeover of Credit Suisse, but underlying profits still failed to meeting analysts' forecasts.

Building materials supplier Grafton was up as it reported a 29% fall in half-year profits amid a challenging market, but still lifted its dividend and announced a new £50m share buyback.

Pernod Ricard shares fell after the owner of Mumm champagne and Absolut vodka reported upbeat full-year results but warned of a softer first quarter in the US and China.

Reporting by Frank Prenesti for Sharecast.com