European shares drop on solid U.S. inflation data

The pan-European STOXX 600 index ended 1.0% lower after data showed U.S. consumer prices rose more than expected in January amid increasing shelter and healthcare costs

European shares dropped on Tuesday after a hotter-than-expected U.S inflation data led traders to cut bets of early interest rate cuts from the Federal Reserve and as technology shares dropped from a more than two-decade high.

The pan-European STOXX 600 index ended 1.0% lower after data showed U.S. consumer prices rose more than expected in January amid increasing shelter and healthcare costs.

Government bond yields increased across the globe, with Germany's 10-year yield reaching a two-month high as traders pushed back bets of the first rate cut from the Fed to June from May.

The CPI is running hotter and this makes the possibility of rate cuts before the summer very unlikely, said Giles Coghlan, chief market analyst at GCFX.

Unless we see a big dip lower in inflation or a big slowdown in the jobs market, I cannot see the Fed cutting before June, Coghlan added.

The Euro STOXX volatility index reached a near one-month high earlier in the session.

Europe's technology sector was at the forefront of the selling pressure, dropping 2.7% from a 23-year high reached in the earlier session.

Shares of chip firms ASML, BE Semiconductor and Infineon dropped between 3% and 5% after peer Siltronic said it expects its EBIT to decline "significantly" in 2024.

Rate-sensitive real estate shares declined to their lowest level since December 1, dropping 2.5%.

European shares were at a near two-year high in the earlier session, led by a solid rally on Wall Street driven by optimism around AI as well as dovish comments by ECB policymakers.

Traders are currently pricing in a nearly 60% probability of an ECB rate cut as soon as April.