European stocks pause as investors braced for US inflation data

Stock and bond markets were steady on Wednesday as investors braced themselves for inflation data that will shape the pace of future monetary tightening by the US Federal Reserve.

The regional Stoxx 600 gained 0.1 per cent by noon and Germany’s Dax index gained 0.2 per cent after losses in the previous session.

Indices in Asia overnight were dragged down by declines in tech stocks, with Hong Kong’s Hang Seng index falling 2.5 per cent. China’s CSI 300 benchmark of Shanghai- and Shenzhen-listed stocks fell 1.2 per cent. Japan’s Topix closed down 0.2 per cent.

Futures contracts tracking Wall Street’s S&P 500 index and technology-heavy Nasdaq 100 both gained 0.2 per cent.

The market moves come ahead of the closely watched release of US consumer price index data on Wednesday, “the only significant economic data of the week”, Adam Cole, chief currency strategist at RBC Capital Markets, wrote in a note.

The benchmark hit 9.1 per cent in June, the highest level in 40 years, which pushed the US central bank into making back-to-back interest rate increases of 0.75 percentage points.

Economists expect month-on-month headline inflation of 0.2 per cent and a year-on-year rate of 8.7 per cent for July. Markets are pricing in the possibility of another 0.75 percentage point rise at the Fed’s next policy meeting in September.

Core inflation, a measure of price growth that strips out volatile categories including energy and food, is expected to accelerate to 6.1 per cent, from 5.9 per cent in June, but below a peak in March of 6.5 per cent.

“Data in line with expectations would probably see the pendulum swing toward a [0.5 percentage point] rise rather than a [0.75 percentage point] move at the next [Federal Reserve] meeting,” Cole said, suggesting that markets are anticipating inflation will surpass economists’ expectations.

This came after the broader Nasdaq Composite fell 1.2 per cent on Tuesday, as a warning from chipmaker Micron Technology on slowing consumer demand sparked fears for the outlook of the sector and economic growth. The S&P 500 fell 0.4 per cent, marking its fourth consecutive daily decline.

However, the S&P 500 has climbed 12 per cent since mid-June, leading to optimism from some investors.

“People are ignoring good news,” said Patrick Spencer, vice-chair of equities at Baird. “I think this might be a new bull market as opposed to a bear market rally. The Fed will pivot eventually, the rate of increases will have to slow . . . if inflation comes in below expectations, the market will rally sharply.”

In government bond markets, the yield on the two-year US Treasury bond, which moves with interest rate expectations, shed 0.03 percentage points to 3.26 per cent. The yield on the 10-year note, which moves with inflation and growth expectations, edged 0.01 per cent lower to 2.79 per cent. Yields move inversely to bond prices.

“Market attention has been alternating between slowing growth and too-high inflation,” said Citi analysts, adding that a stronger inflation reading “will have the market — and possibly Fed officials — thinking about a 100 [basis point] hike or a 75bp in September, followed by another in November”.

Oil prices edged lower on Wednesday, with international benchmark Brent crude shedding 1.8 per cent to trade at $94.56 a barrel and US marker West Texas Intermediate down 1.8 per cent at $88.9.