European stocks were steady on Thursday even as a smaller than expected decline in eurozone inflation added to investor concerns that interest rates are set to stay higher for longer than previously forecast.
Prices across the eurozone rose 8.5 per cent in February, down from 8.6 per cent in January but more than the 8.2 per cent forecast by economists polled by Reuters.
Core inflation, which strips out volatile food and energy to give a clearer picture of underlying price pressures, rose to a new eurozone record of 5.6 per cent, up from 5.3 per cent the previous month. Economists had expected the figure to rise to 5.5 per cent.
Stronger than expected inflation data from Germany, Spain and France earlier this week meant “the surprise factor for a big number in the eurozone-wide figures was dampened”, said Tim Graf, head of European macro strategy at State Street Global Markets.
Europe’s Stoxx 600 rebounded from earlier losses, trading flat shortly after the figures were released. London’s FTSE 100 was down 0.1 per cent.
February’s inflation figures nevertheless add to the pressure on the European Central Bank to continue raising interest rates in the months ahead.
“We have been forecasting a [half percentage point] hike at the [ECB’s] meeting in two weeks’ time 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 equity markets come after a sobering few weeks for investors who had hoped central bank interest rates on both sides of the Atlantic were close to peaking.
“Attitudes are in the dumps,” said Mike Zigmont, head of trading and research at Harvest Volatility Management. “We haven’t had a positive data point or headline in a while and the wait is weighing on both stocks and bonds.”
Futures markets now indicate that the Federal Reserve’s main policy rate will hit 5.5 per cent in September, having anticipated at the start of February that borrowing costs would crest at just below 5 per cent. Investors are betting that the ECB will be forced to raise rates to all-time highs later this year on the back of strong service-sector activity and wage demands last month.
Separate data out on Thursday showed the eurozone’s unemployment rate was unchanged at 6.7 per cent.
The euro slipped 0.3 per cent against the dollar to $1.062, undercutting a 0.9 per cent rise against the world’s de facto reserve currency on Wednesday.
Contracts tracking Wall Street’s benchmark S&P 500 and those tracking the tech-heavy Nasdaq 100 fell 0.3 per cent and 0.5 per cent respectively ahead of the New York open.
US government bonds also sold off, with the yield on the two-year Treasury — the bond most sensitive to inflation — rising 0.01 percentage points to 4.9 per cent, its highest level since 2007. The yield on the benchmark 10-year Treasury rose 0.03 percentage points to 4.02 per cent.
Asian markets declined on Thursday as investors reassessed the optimism over China’s economic recovery that had buoyed equities to strong gains a day earlier. Hong Kong’s Hang Seng index lost 0.9 per cent while Japan’s Topix declined 0.15 per cent and the China CSI 300 fell 0.2 per cent.
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