By Ankika Biswas and Amruta Khandekar
(Reuters) -European shares dropped on Wednesday as strong underlying inflation in the U.S. indicated that the Federal Reserve may need to keep interest rates elevated for a while, while a slew of upbeat corporate earnings helped stave off a steeper fall.
The pan-European STOXX 600 index closed 0.4% lower.
The benchmark index briefly turned positive earlier in the day following the release of the data that showed headline CPI in the world's largest economy eased on an annual basis in April.
However, a deeper dive into the report showed underlying inflation in the U.S. remained strong.
"Inflation will fail to settle at levels where the Fed is comfortable with (at 2%)," said Andrea Cicione, head of research at TS Lombard.
"Without a recession, inflation will not fall towards the Fed's target, which means that the Fed could be pausing now, but eventually they will start to hike again to bring inflation towards target."
Investors also kept a tab on talks on raising the U.S. federal government's $31.4 trillion debt ceiling that entered a new phase on Wednesday, with the Treasury Department warning of a default as soon as June 1.
Meanwhile, Governing Council member Mario Centeno noted that the European Central Bank's interest rate is at the peak of its cycle, while Greek central bank chief Yannis Stournaras also said that the ECB's monetary tightening cycle will end this year if there are no dramatic changes.
Personal and household goods and food and beverages were the worst hit among major sectors, while technology and real estate were among the rare gainers.
Orphan Biovitrum (SOBI) was the top laggard with 14.5% after the Swedish drugmaker made a $1.7-billion cash offer to buy U.S. biopharmaceutical firm CTI Biopharma.
Swedish real estate company SBB slid for the third straight day, losing 46% during the period, amid concerns over the group's debt and as a top executive sold stock.
Meanwhile, a better-than-expected corporate earnings season has been largely supportive for equities.
Alcon was among the top gainers on the STOXX 600 with an 7.4% advance following better-than-expected first-quarter earnings.
Danish wind turbine maker Vestas jumped 3.7% after posting an unexpected first-quarter profit and maintaining its full-year guidance despite a tough backdrop for the industry.
Among others, Credit Agricole (EPA:CAGR) SA gained 5.0% after the France's second-biggest listed bank beat estimates for first-quarter earnings as trading revenue rose.
Of the 205 companies in the STOXX 600 that have reported first-quarter earnings so far, over half have beaten analyst estimates, according to Refinitiv data.