By Bansari Mayur Kamdar and Shubham Batra
(Reuters) -European shares rose on Friday after a drop in euro zone inflation in September cemented hopes the European Central Bank will pause its interest rate hikes, but the benchmark index still logged its worst quarter in a year.
The pan-European STOXX 600 index was up 0.4% on Friday, but ended the quarter 2.5% lower.
Inflation in the euro zone hit its lowest level in two years in September, suggesting the ECB's steady diet of interest rate hikes was succeeding in curbing runaway prices, albeit at a growing cost for economic growth.
"If disinflation and stagnation continue as we think, discussions about rate cuts will return sooner than markets expect," Davide Oneglia, director for European and Global Macro at TS Lombard, said in a note.
Germany's 10-year government bond yield, the benchmark for the euro area, was down 15 bps at 2.818%.
Rate-sensitive real estate shares rose the most in more than ten weeks, jumping 2.7%, while technology shares added 1.1% after softer-than-expected inflation data.
Tech stocks have underperformed this quarter to fall more than 10% as bond yields rallied on worries about higher-for-longer interest rates.
Oil and gas shares were the worst hit during the session, falling 1.3% after oil prices fell, with macroeconomic concerns curbing a recent rally. [O/R]
German retail sales unexpectedly fell in August as high inflation took its toll on consumption in the euro zone's largest economy, while inflation in France unexpectedly slowed in September.
Among individual stocks, Commerzbank (ETR:CBKG) was the top gainer on the STOXX 600, soaring 11.1% after the German lender said it was revamping its payout policy for investors, aiming for a return of least 70% of profit for 2024.
Adidas (ETR:ADSGN) climbed 6.2% after U.S. peer Nike (NYSE:NKE) beat profit estimates on Thursday.
Luxury stocks such as LVMH (EPA:LVMH) and Richemont (LON:0QMU) gained 1.5% and 1.9% respectively.
London's commodity-heavy FTSE 100 meanwhile climbed 0.1% and was up 1.0% this quarter, outpacing European peers.
Britain's economic performance since the start of the COVID-19 pandemic has been stronger than previously thought, with faster growth than Germany or France, according to revisions to official data released on Friday.