European stocks steady after latest eurozone inflation figures
European stocks were steady on Thursday, even as a smaller-than-expected fall in euro-zone inflation fueled investor concerns that interest rates will stay longer than previously forecast.
Prices across the euro zone rose 8.5 percent in February, compared with 8.6 percent in January, but more than the 8.2 percent forecast by economists polled by Reuters.
Core inflation, which excludes volatile food and energy to give a clearer picture of underlying price pressures, rose to a new euro-zone record of 5.6 percent, up from 5.3 percent in the previous month. Economists had expected an increase to 5.5 percent.
Stronger-than-expected inflation data from Germany, Spain and France earlier this week meant “the surprise factor has been dampened for a large number in euro-zone-wide numbers,” said Tim Graf, head of European macro strategy at State Street Global Markets.
The European Stoxx 600 rebounded from earlier losses and traded flat shortly after the numbers were released. The London FTSE 100 lost 0.1 percent.
However, February’s inflation numbers are increasing the pressure on the European Central Bank to raise interest rates further in the coming months.
“We forecast a [half percentage point] hike at the [ECB’s] Meeting in two weeks and another in May, but further hikes at later meetings now look increasingly likely,” said Jack Allen-Reynolds, deputy chief eurozone economist at Capital Economics.
The moves in stock markets come after a sobering few weeks for investors who had hoped central bank rates on both sides of the Atlantic would be close to peaking.
“Hiring is in the doldrums,” said Mike Zigmont, head of trading and research at Harvest Volatility Management. “We haven’t had any positive data points or headlines in a while and the wait is weighing on both stocks and bonds.”
Futures markets are now suggesting that the Federal Reserve’s main interest rate will hit 5.5% in September after expectations in early February that borrowing costs would rise just under 5%. Investors are betting that the ECB will be forced to hike rates to an all-time high later this year on the back of strong service sector activity and wage demands over the past month.
Separate data released on Thursday showed that the euro-zone unemployment rate was unchanged at 6.7 percent.
The euro slipped 0.3 percent against the dollar to $1.062, undercutting a 0.9 percent gain against the world’s de facto reserve currency on Wednesday.
Contracts that track Wall Street’s benchmark S&P 500 and contracts that track the tech-heavy Nasdaq 100 fell 0.3 percent and 0.5 percent, respectively, ahead of the New York open.
US Treasuries also sold off, with the yield on the two-year bond – the most inflation-sensitive bond – rising 0.01 percentage point to 4.9 percent, the highest since 2007. The yield on the benchmark 10-year bond rose 0 .03 percentage points to 4.02 percent.
Asian markets fell on Thursday as investors reassessed optimism about China’s economic recovery that had boosted equities a day earlier. Hong Kong’s Hang Seng Index slipped 0.9 percent, while Japan’s Topix slipped 0.15 percent and the China CSI 300 fell 0.2 percent.