European shares slip lower ahead of closely watched US inflation reading

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European stocks slipped lower on Wednesday, while the euro stayed on the cusp of parity with the dollar, as traders awaited a closely watched US inflation report due later in the day.

The regional Stoxx Europe 600 share index — which has fallen almost 15 per cent so far this year in a broad global stock downturn driven by big central banks raising interest rates — lost 0.7 per cent in morning dealings. London’s FTSE 100 fell 0.8 per cent and Germany’s Xetra Dax dropped 0.6 per cent.

US inflation data, to be published on Wednesday, are expected to show that the annual pace of consumer price increases in the world’s largest economy rose to a fresh 40-year high of 8.8 per cent last month.

A surprisingly high inflation print for May pushed the Federal Reserve to raise its main funds rate by an extra-large 0.75 percentage points in June, its most since 1994.

“Any further surprises today could have a big impact,” said Jim Reid, strategist at Deutsche Bank, adding that the bank’s own economists believe the annual inflation rate has hit 9 per cent.

Economists at Goldman Sachs, however, expect the core monthly inflation rate, which excludes fuel and food costs, to have slowed to 0.5 per cent, from 0.6 per cent in May. According to the US bank, retailers are probably cutting prices to shift unsold stock and a surge in rents has eased.

The euro remained at a fraction above $1 on Wednesday, having been pushed lower partly by worries over Russia cutting off gas supplies to Europe. The dollar index, which measures the US currency against six others, was steady at about a two-decade high, boosted by warnings of a global recession and the Fed raising interest rates.

The US central bank’s benchmark interest rate is at present in a range of 1.5 per cent to 1.75 per cent and futures markets are pricing a further 0.75 per cent rise in July.

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

However, downbeat manufacturing and consumer surveys have prompted traders to scale back their forecasts of how far the Fed will raise rates, with futures markets implying a high point of about 3.4 per cent next February.

In bond markets, the yield on the benchmark US Treasury was steady at 2.96 per cent. This yield, which sets the tone for debt costs worldwide, has dropped from about 3.5 per cent a month ago as economic uncertainty drove up the price of the haven asset.

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

Brent crude, the international oil benchmark, added 1.1 per cent to about $101 a barrel. Oil prices had slumped on Tuesday as threats of new coronavirus lockdowns in China further clouded the outlook for oil demand, despite western sanctions against big producer Russia following its invasion of Ukraine.

Futures trading signalled Wall Street’s S&P 500 share index would open 0.3 per cent higher, following a 0.9 per cent loss in the previous session.

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