European shares were steady in early trading on Thursday, rising slightly after falling to their lowest level in more than a month in the previous session, as investors awaited a crucial interest rate decision from the European Central Bank later in the day.
The pan-European STOXX 600 index rose 0.1%, recovering some of its losses after falling 1.4% on Wednesday to close at its lowest level since late July.
Extreme caution prevailed on trading tables in Frankfurt, Paris and London, as traders weighed the potential for a modest recovery against the risk of inflation driven by ongoing costs, with Brent crude remaining firmly above the $100.00 per barrel mark.
From a summer pause to a discounted 25 basis point increase
Thursday’s meeting of the Governing Council in Frankfurt represents a dramatic shift in market expectations, with financial markets almost fully pricing in a 25-basis-point interest rate hike, which would raise the benchmark deposit rate to 2.50%.
Just a few weeks ago, the prevailing expectation was that the European Central Bank would keep interest rates unchanged. However, a rapid succession of macroeconomic and geopolitical shocks abruptly shattered the central bank's hold-up scenario.
Direct military confrontations in the Middle East—including attacks targeting oil tankers in the Arabian Gulf and regional infrastructure—have led to a sharp rise in crude oil prices, pushing them into triple digits. This surge has reignited fears of a stagflationary wave similar to that of the 1970s, threatening to directly impact supply chains in the European manufacturing and transport sectors due to increased energy costs.
Preliminary figures from Eurostat showed that the headline consumer price index in the Eurozone accelerated to 3.3% year-on-year, driven mainly by a 14.3% rise in the energy component.
European Central Bank guidance and the upcoming US inflation test
With inflation moving further away from the European Central Bank’s 2% target, President Christine Lagarde and hawkish policymakers have indicated that the central bank cannot risk allowing energy-driven price pressures to cement the effects of a second round on wages.
With a 25-basis-point rate hike largely priced into asset valuations, trading tables are focused on President Lagarde's afternoon press conference for clues about the future path of interest rates.
Traders will scrutinize the European Central Bank staff's updated macroeconomic forecasts – particularly the 2027 inflation projections – to assess whether policymakers view the current tightening move as a temporary adjustment or the start of a prolonged interest rate hike cycle in the autumn.
Away from Frankfurt, the eyes of global stock markets are turning to the US Consumer Price Index (CPI) report due on Friday, which will be the last major entry point before the Federal Reserve's monetary policy decision scheduled for September 15-16.
