European stocks pause as investors brace for US inflation data

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

The regional Stoxx 600 gained 0.1% at midday and the German Dax index gained 0.2% after losses in the previous session.

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

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

The market moves closely precede Wednesday’s release of U.S. Consumer Price Index data, “the only meaningful economic data of the week,” wrote Adam Cole, chief currency strategist at RBC Capital. Markets, in a footnote.

The benchmark index hit 9.1% in June, the highest level in 40 years, prompting the US central bank to make consecutive interest rate hikes of 0.75 percentage points.

Economists expect monthly headline inflation of 0.2% and an annual rate of 8.7% for July. Markets are pricing in the possibility of another 0.75 percentage point hike at the Fed’s next monetary policy meeting in September.

Core inflation, a measure of price growth that excludes volatile categories such as energy and food, is expected to accelerate to 6.1% from 5.9% in June, but below from a peak of 6.5% in March.

“Data in line with expectations would likely swing the pendulum toward a [0.5 percentage point] go up rather than [0.75 percentage point] move to next [Federal Reserve] meeting,” Cole said, suggesting markets expect inflation to beat economists’ expectations.

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

However, the S&P 500 has climbed 12% since mid-June, raising optimism among some investors.

“People ignore good news,” said Patrick Spencer, vice president of equities at Baird. “I think this could be a new bull market as opposed to a bearish rally. The Fed will eventually pivot, the pace of increases will have to slow . . . if inflation is lower than expected, the market will rally strongly.

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

“Market attention has alternated between slowing growth and overly high inflation,” Citi analysts said, adding that a stronger inflation reading “will get the market thinking — and perhaps Fed officials – 100%. [basis point] rise or a 75 bp rise in September, followed by another in November”.

Oil prices fell slightly on Wednesday, with international benchmark Brent shedding 1.8% to trade at $94.56 a barrel and U.S. marker West Texas Intermediate down 1.8% at $88.9.

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