European and Asian stocks edged lower on Monday as investors looked ahead to the US central bank implementing another extra-large interest rate rise to tame inflation.

The regional Stoxx Europe 600 share index fell 0.2 per cent in early dealings while London’s FTSE 100 slipped 0.3 per cent. Hong Kong’s Hang Seng share index edged 0.5 per cent lower and Japan’s Nikkei 225 lost 0.8 per cent.

Market sentiment has swung in recent weeks between fears of an economic downturn hitting company profits and hopes that weaker demand will quell red-hot inflation and sway central banks towards more supportive monetary policy.

“Economic weakness is coming through in all areas and demand is falling because of inflationary pressures,” said Neil Birrell, chief investment officer at Premier Miton Investors.

“But bad news can be good news in very macro-driven markets and sentiment has become incredibly fickle,” he added. “You can come out with an argument to be bullish or bearish on almost any asset class.”

The Fed is widely expected to raise its main interest rate by 0.75 percentage points for the second consecutive month this week, which would increase the funds rate to a range of 2.25 per cent to 2.5 per cent.

The annual rate of US inflation rose to 9.1 per cent last month. But signs of a housing market slowdown and a consumer spending decline have started to emerge. Futures markets tip the Fed to raise rates to just under 3.4 per cent by next February before starting to cut again.

Wall Street’s S&P 500 equity gauge closed 0.9 per cent lower on Friday, taking its year-to-date fall to 17 per cent after disappointing business surveys for the US and Europe darkened the economic outlook.

Futures markets indicated the S&P 500 would declined a further 0.2 per cent in early New York trading on Monday.

In Europe, a purchasing managers’ index published on Friday showed business activity was contracting after inflation hit a record and Russia stoked fears about energy security by cutting gas supplies.

Oil slipped on Monday, with Brent crude falling 1.2 per cent to $102.02 a barrel. The euro traded steadily against the dollar, buying $1.02.

The European Central Bank also raised its main interest rate last week for the first time in 11 years, heightening stress in Italian debt markets.

German government bonds softened after a rally at the end of last week as traders sought out low-risk assets to shelter from economic uncertainty.

The yield on Germany’s 10-year bond, a barometer for debt costs in the eurozone, added 0.02 percentage points to 1 per cent as the price of the debt fell.

Italy’s equivalent debt yield was steady at 3.38 per cent, although the premium investors demanded to lend to Italy over Germany, a gauge of financial stress closely watched by the ECB, remained at an elevated 2.36 percentage points.