Financial basis

European stocks fall ahead of closely watched US inflation reading

European stocks fell on Wednesday, while the euro remained at parity with the dollar, as traders awaited a closely watched US inflation report due later in the day.

The regional Stoxx Europe 600 stock index – which has fallen nearly 15% so far this year in a broad global equity pullback driven by major central banks raising interest rates – lost 0.7% in morning transactions. London’s FTSE 100 fell 0.8% and Germany’s Xetra Dax fell 0.6%.

US inflation data, to be released on Wednesday, is expected to show the annual pace of consumer price inflation in the world’s largest economy hit a new 40-year high of 8.8% last month.

A surprisingly high inflation print for May prompted the Federal Reserve to raise its key policy rate by 0.75 percentage points in June, its highest rate since 1994.

“Any other surprises today could have a big impact,” said Deutsche Bank strategist Jim Reid, adding that the bank’s own economists estimate the annual inflation rate to have hit 9%.

Goldman Sachs economists, however, expect the monthly core inflation rate, which excludes fuel and food costs, to have slowed to 0.5% from 0.6% in May. According to the American bank, retailers are probably reducing prices to dispose of unsold goods and the surge in rents has eased.

The euro remained a fraction above $1 on Wednesday, after being pushed lower in part by fears that Russia could cut gas supplies to Europe. The dollar index, which measures the U.S. currency against six others, held steady at a roughly two-decade high, boosted by warnings of a global recession and the Fed’s interest rate hike.

The US central bank’s benchmark interest rate is currently in a range of 1.5% to 1.75% and futures markets are pricing in a further 0.75% hike in July.

“If we saw a very hot [inflation] number, it could potentially open the door to 100 basis points” in July, said Grace Peters, head of European equity strategy at JPMorgan Private Banking, “or some other 75 basis point hikes.”

However, pessimistic manufacturing and consumer surveys have prompted traders to revise their expectations of the extent of the Fed’s rate hike down, with futures markets implying a high point around 3.4. % next February.

In the bond markets, the yield on the benchmark US Treasury remained stable at 2.96%. That yield, which sets the tone for debt costs around the world, fell around 3.5% a month ago as economic uncertainty pushed the price of the safe-haven asset higher.

The two-year Treasury yield, which tracks interest rate expectations, was also steady at 3.05%, reflecting a so-called inverted yield curve that has historically preceded recessions. The gap between the two yields is about its widest since 2007.

Brent crude, the international oil benchmark, added 1.1% to around $101 a barrel. Oil prices fell on Tuesday as threats of new coronavirus lockdowns in China further clouded the outlook for oil demand, despite Western sanctions on the major Russian producer following its invasion of Ukraine.

Futures trading signaled that Wall Street’s S&P 500 stock index would open 0.3% higher, following a 0.9% loss in the previous session.