(Bloomberg) -- European stocks rose after the US reported slower-than-estimated inflation, encouraging traders that the Federal Reserve is likely to lower interest rates later this year, just hours before the central bank provides updated rate projections.

The Stoxx Europe 600 Index gained 1.1% at the close in London. Rate-sensitive real estate and technology led gains. Equities rallied after a key measure of underlying US inflation cooled down for a second month in May, a pleasant surprise for Fed officials looking for signs that they can start to lower interest rates. 

“This fall provides evidence that monetary policy is having its intended effect,” said Richard Flynn, managing director at Charles Schwab UK. “If inflation drops consistently in the coming months, central bankers should be convinced to finally reduce interest rates. For the Fed, today’s numbers reflect progress, but not yet success.”

The policy-setting Federal Open Market Committee is widely expected to hold its benchmark rate steady on Wednesday for a seventh consecutive meeting, but there’s less certainty on officials’ projections for later in the year. The CPI report will help inform the Fed decision. 

Some 41% of economists expect the Fed to signal two cuts in the closely watched “dot plot,” while an equal proportion expect the forecasts to show just one or no cuts at all, according to the median estimate in a Bloomberg survey.

The European Central Bank has moved ahead of the Fed for the first time ever, cutting rates last week, but said it wasn’t committing to a particular rate path. The focus has now turned to political risks. The Stoxx 600 came under pressure this week after European parliamentary voting over the weekend. Traders are particularly fixated on French assets, which have tumbled after President Emmanuel Macron’s decision to call a snap parliamentary election.

Among individual movers, Rentokil Initial Plc climbed 14% after activist investor Nelson Peltz’s Trian Fund Management LP amassed a significant stake in UK-based pest-control company.

For more on equity markets:

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  • Raspberry Pi Hands London a Starry Debut at Long Last: ECM Watch
  • Unemployment Hits 4.4%: The London Rush

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--With assistance from Michael Msika.

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