European stocks fall as hot US payrolls flare rate worries

By Shristi Achar A and Shashwat Chauhan

(Reuters) -European shares fell on Friday, led by rate-sensitive sectors like real estate and utilities after a stronger-than-anticipated U.S. jobs report fanned worries that the Federal Reserve would not cut interest rates anytime soon.

The continent-wide STOXX 600 closed 0.2% lower, but recorded its first weekly gain in three weeks.

The U.S. economy created far more jobs than expected in May and annual wage growth re-accelerated, Labor Department data showed, underscoring the resilience of the labor market and reducing the likelihood the Fed will be able to start cutting rates in September.

"We believe the Fed does want to cut this year, but a cut is unlikely to happen until September at the earliest," said John Kerschner, head of U.S. securitised products & portfolio manager at Janus Henderson Investors.

"And when they do, it's likely they message this does not kick off a consistent hiking cycle of 25 bps per meeting, but perhaps a more infrequent cadence such as every other meeting."

Real estate led sectoral losses with a near 3% drop, dragged down by a 7.2% fall in German real estate group Vonovia on a Morgan Stanley rating downgrade.

Government bond yields, which move inversely to prices, rose across the continent following the U.S. data, with the yield on the benchmark 10-year Bund last at 2.622%.

Helping limit losses, heavyweight health care stocks advanced 0.5% while technology continued its strong run with a 0.4% gain.

A day earlier, the European Central Bank delivered a 25-basis-point rate cut, its first since 2019, joining central banks in Canada, Sweden and Switzerland in easing the monetary policy.

The ECB, however, provided few clues about the future interest rate path, leading traders to scale back bets on additional rate cuts.

Finnish ECB policymaker Olli Rehn said in a blog post that inflation will continue to decline and interest rate cuts will support economic recovery, while Bundesbank President Joachim Nagel said the ECB was not on autopilot mode and was still acting restrictively despite the cut.

Among individual stocks, Swiss banking software firm Temenos rose 5.1% after announcing a new share buyback programme of up to 200 million Swiss francs ($224.92 million).

Italy's biggest bad loan company doValue gained 2.7% as it is set to acquire rival Gardant in a deal that includes 230 million euros ($250.59 million) in cash and the issuance of new shares.

(Reporting by Shristi Achar A, Shashwat Chauhan and Purvi Agarwal in Bengaluru; Editing by Krishna Chandra Eluri, Kirsten Donovan)