Stocks fall as central bankers say inflation outlook not improving

© Reuters. FILE PHOTO: A man wearing a protective mask, amid the coronavirus disease (COVID-19) outbreak, walks past an electronic board displaying Shanghai Composite index, Nikkei index and Dow Jones Industrial Average outside a brokerage in Tokyo, Japan, March 7,

By Tommy Wilkes

LONDON (Reuters) - European stocks dropped on Thursday, tracking falls on Wall Street after Federal Reserve officials said in policy meeting minutes that inflation pressures were not easing and a European Central Bank official warned the outlook had not improved.

By 0835 GMT, the Euro STOXX was down 0.13%, while Wall Street futures pointed to a weaker open after the main indexes closed lower..

MSCI's broadest index of Asia-Pacific shares outside Japan lost 0.5%.

Stocks have staged a strong rebound in the past two months on hopes a peak in the pace of monetary tightening is within sight, but they remain vulnerable to central banker warnings that the fight against price pressures is far from over.

Federal Reserve officials saw "little evidence" late last month that U.S. inflation pressures were easing, according to the minutes of their July 26-27 policy meeting released on Wednesday.

While not explicitly hinting at a particular pace of coming rate increases, beginning with the Sept. 20-21 meeting, the minutes showed U.S. central bank policymakers committed to raising rates as high as necessary to tame inflation.

ECB board member Isabel Schnabel told Reuters in an interview that the euro zone inflation outlook had not improved since a July rate hike, suggesting she favoured another large interest rate increase next month even as recession risks harden.

"After a very strong run for risk assets thanks to a narrative that we might have seen “peak inflation”, yesterday put a stop to that as multiple headlines came through that poured cold water on the prospect that central banks were about to let up on hiking rates," said Deutsche Bank (ETR:DBKGn) analysts.

The latest central banks to hike were the Reserve Bank of New Zealand on Wednesday and the Norwegian bank on Thursday, both raising rates by 50 basis points.

BUOYANT DOLLAR

The dollar rose towards a three week high after the Fed's minutes. The euro slipped 0.1% to $1.0168 while the pound fell back below $1.20.

After the recent rally across risk assets, some fund managers are warning about the outlook.

"Investors need to hedge urgently - the environment which has led to this bear market rally, which we concede we did not see being as strong as it has been, is about to change," said Mohammed Apabhai, Citigroup (NYSE:C)'s head of Asia Pacific Trading Strategies.

"The Fed has seen monetary conditions loosening and is now set to continue with its tightening. In particular, it is now set to double the pace of quantitative tightening from the current $47.5 billion to $95 billion starting Sept. 1."

The yield on the benchmark 10-year Treasury notes rose initially in Asian trade but later retreated to 2.884%.

The two-year yield, which rises with traders' expectations of higher Fed funds rates, was unchanged at 3.287%.

U.S. crude ticked up 0.3% to $88.41 a barrel. Brent crude rose 0.5% to $94.15 per barrel.

Spot gold inched up 0.2% to $1764.93 per ounce. [GOL/]