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European stocks dip as investors await US inflation data

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Newsletter: Unhedged

European equities drifted lower as traders anticipated that data would show a continued surge in US inflation that may sway the Federal Reserve towards tightening its pandemic-driven loose monetary policies.

The Stoxx Europe 600 index fell 0.2 per cent, although it remained close to a record high driven by the region’s economic recovery from the coronavirus crisis. London’s FTSE 100 lost 0.3 per cent and Germany’s Xetra Dax was flat.

Futures markets signalled that Wall Street’s S&P 500 and the technology-focused Nasdaq Composite would be flat in early New York dealings.

Economists polled by Bloomberg forecast that data released later on Tuesday would show headline US consumer prices rose 5.3 per cent in August compared with the same time last year, marking the third consecutive month inflation will have topped 5 per cent.

Federal Reserve officials do not expect to raise interest rates from their current record low level until 2023. Jay Powell, chair of the central bank, has argued that higher inflation is caused by temporary factors related to the pandemic, such as computer chip shortages and shipping disruptions.

But US households now believe inflation will be at 5.2 per cent in a year’s time, according to a survey by the New York Federal Reserve, far exceeding the central bank’s target of price rises averaging 2 per cent over time.

Brent crude, the oil benchmark, rose 0.8 per cent to $74.11 a barrel on Tuesday, heading for its third consecutive day of gains.

US central bank officials have indicated in recent days their willingness to taper the $120bn of monthly bond purchases the Fed has conducted through the pandemic to lower borrowing costs and boost lending and spending.

Another high inflation print “gives us one more reason to expect that tapering will happen before the end of the year,” said Rebecca Chesworth, head of equities at State Street’s SPDR ETFs business.

A cut in the Fed’s bond purchases was widely predicted, she added, “but what would have more impact is the rate rises that come thereafter.”

“I’m leaning towards inflation becoming more permanent than many investors believe,” said Kasper Elmgreen, head of equities at Amundi, citing wage increases as US employers struggle to fill positions and the risk of rents rising as house prices boom.

“We are then getting into a stagflationary environment, potentially,” Elmgreen said, as a rebound in GDP growth from 2020’s lows levels off.

A Bank of America survey of 258 asset managers found that a net 13 per cent expect global economic growth to rise, the lowest amount since April 2020. But half the respondents still believed stock markets would go higher.

“Growth expectations are saying equity allocations should fall,” BofA strategists wrote in a note accompanying the survey.

The yield on the 10-year US Treasury note, which moves inversely to the price of the government debt security and influences borrowing costs worldwide, added 0.02 percentage points to 1.339 per cent. Germany’s equivalent Bund yield rose by the same amount to minus 0.312 per cent.

The dollar index, which measures the US currency against six others, was steady. Sterling gained 0.2 per cent against the dollar to $1.3866 after job vacancy data showed UK employers were rushing to hire new staff just as the government prepares to withdraw pandemic-related wage subsidies.

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