European stock markets faced a downturn on Wednesday, primarily driven by the UK’s unexpected contraction in July, while investors remained cautious ahead of crucial U.S. inflation data.
As of 03:25 ET (07:25 GMT), key European indices displayed a mixed performance, with the DAX index in Germany trading 0.2% lower, the CAC 40 in France down 0.1%, and the FTSE 100 in the UK falling 0.2%.
UK Economy Contracts in July
The UK economy reported a contraction of 0.5% on a monthly basis in July, surpassing expectations of a 0.2% decline, according to data released earlier on Wednesday. This decline was attributed to strikes in hospitals and schools, which weighed on overall economic output.
The data also revealed a 0.7% drop in industrial production and a 0.8% decline in manufacturing output during the same period, emphasizing the challenges faced by the country’s industrial sector. All major sectors of the economy, including services, manufacturing, and construction, saw declines during the month.
While the Bank of England (BOE) is widely anticipated to raise interest rates to 5.5% from the current 5.25% next week, the recent economic slowdown has raised concerns that this hike could mark the conclusion of the tightening cycle initiated in December 2021.
Expectations of Another ECB Rate Hike Rise
Ahead of the BOE’s decision, the European Central Bank (ECB) is set to meet on Thursday. Expectations for another quarter-point rate hike have increased following a Reuters report suggesting that the central bank expects inflation to remain above 3% in the coming year, well above its 2% target.
The ECB has increased rates at each of its past nine meetings, and a further 25 basis point increase would elevate the key deposit rate to 4%. Later in the session, July eurozone industrial production data is expected to reveal a 0.7% month-on-month decline and a 0.3% year-on-year drop.
U.S. Inflation Data to Shape Fed Decisions
The day’s pivotal economic release will come from the United States in the form of the August consumer price index (CPI). This data will provide further insights into the country’s inflation outlook and may offer clarity on future interest rate decisions by the Federal Reserve.
The core CPI, which excludes volatile food and energy prices, is expected to moderate to 4.3% year-on-year in August from the previous 4.7%. However, soaring oil prices could push the headline annual figure up to 3.6%, compared to 3.2% in the prior month.
Federal Reserve officials have signaled the possibility of a pause in rate hikes at their upcoming meeting, having raised rates in 11 out of their past 12 meetings. Nevertheless, some have cautioned against interpreting a pause as a sign of finality.
BP CEO Departs Amid Controversy
In corporate news, BP PLC (LON:BP) shares declined by 1% following the unexpected departure of CEO Bernard Looney late Tuesday, due to his failure to fully disclose details of past personal relationships with colleagues. Looney had played a key role in BP’s energy transition strategy, and his departure raises questions about the company’s future direction.
Redrow Faces Challenges as Interest Rates Rise
Redrow (LON:RDW) shares fell by 0.6% as the UK housebuilder reported a decline in full-year completions, citing rising mortgage affordability issues amidst interest rate hikes. The company also highlighted ongoing headwinds, with summer sales expected to be challenging.
Oil Prices Gain Traction
Oil prices experienced gains on Wednesday, buoyed by a bullish demand outlook from the OPEC monthly report and signs of global supply tightness. The report from the Organization of Petroleum Exporting Countries (OPEC) stated that oil markets were set to tighten further this year, driven by strong demand and reduced production.
The International Energy Agency’s monthly report was due for release in this session. Additionally, the Energy Information Administration predicted a drop in global oil inventories of nearly half a million barrels per day in the second half of 2023. These developments overshadowed data from the American Petroleum Institute, which indicated a 1.2 million barrel increase in U.S. crude inventories last week, potentially suggesting a cooling in fuel consumption in the world’s largest economy after a robust summer season.
As of 03:25 ET, U.S. crude futures traded 0.4% higher at $89.17 a barrel, while the Brent contract climbed 0.2% to $92.28. Both contracts were nearing their highest levels since November 2022.
Furthermore, gold futures registered a 0.1% decline, trading at $1,932.95/oz, while the EUR/USD currency pair was down 0.1% at 1.0738.
