By Sruthi Shankar and Johann M Cherian
(Reuters) - European stocks recouped earlier losses and closed up on Wednesday, as investors added to bets that the Federal Reserve could lower interest rates later in the month after an in-line U.S. inflation report.
The pan-European STOXX 600 index had slipped earlier in the day, but settled higher by 0.3% after U.S. data showed the Consumer Price Index (CPI) rose as expected in November on both a monthly and annual basis.
Odds of a 25-basis-point cut by the Fed next week stood at 95%, as per CME's FedWatch tool, compared with about 85% before the data.
Closer to home, focus will be on the European Central bank's policy move on Thursday, with LSEG probabilities data indicating an 85% chance for a 25 bps reduction.
"The weakness in the business surveys, combined with the potential for tariffs on European exports to the U.S., increases the risk of a European recession," said Joe McConnell, European Liquidity Strategies Portfolio Manager at J.P. Morgan Asset Management.
McConnell expects the ECB will cut rates by 0.25% at every meeting between now and June, taking the deposit rate down to 2% by the middle of next year.
The rate-sensitive banks index edged up 0.1% to touch its highest since August 2015. More broadly, expectations of interest rate cuts have been the primary driver for the STOXX's 8.6% rise so far this year.
The aerospace and defence sector led gains on the day with a 1.4% rise and has witnessed the biggest gains among peers this year. Investors monitored Ukraine's latest strike on Russia using U.S.-made missiles.
However, disappointing corporate updates kept a lid on advances, with Zara owner Inditex (BME:ITX) sliding 6.5% after the world's biggest listed fast-fashion retailer posted a rare miss on third-quarter sales even as it said the holiday shopping season had got off to a good start.
Spain's main index hit a one-week low and the broader STOXX retail index dropped 1.8%, and notched its biggest percentage drop in more than a month.
France was also in focus after President Emmanuel Macron on Tuesday set himself 48 hours to name a new prime minister. Michel Barnier's government was ousted last week, sparking France's second major political crisis in six months.
Among others, Carl Zeiss slid 12.2% after the German optical systems maker reported weaker-than-expected full-year results.
About You soared 66.2% after German online retailer Zalando said it would acquire the fashion group in a 1.1 billion euros ($1.2 billion) deal. Zalando gave up early losses and closed up 1.6%.
TUI rose 3.33% after Europe's largest tour operator reported higher profit in the 2024 financial year and projected further growth next year.
(This story has been refiled to add the dropped word 'rise' in paragraph 7)