European equities hover in tight range ahead of US inflation report

European equities drifted around record highs and global government bonds traded indecisively on Tuesday ahead of US inflation data that may shift market expectations on interest rates in the world’s largest economy.

The Stoxx Europe 600 share index, which like Wall Street’s S&P 500 ended Monday’s session at an all-time high as investors focused on optimism about companies’ second-quarter earnings, was flat in early dealings on Tuesday. London’s FTSE 100 index ticked up 0.3 per cent.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, was flat at 1.361 per cent, having climbed from a four-month low of about 1.25 per cent last week ahead of the US inflation report. Germany’s 10-year bond yield was also steady at minus 0.296 per cent.

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Economists polled by Reuters expect that US consumer prices rose 0.5 per cent in June from the previous month and 4.9 per cent from the same month last year. This would be the third consecutive month that prices rose more than 4 per cent on a year-over-year basis, in moves that have sparked intense debate over whether the Federal Reserve will respond by tightening monetary policy.

“It is still too early to tell if high inflation readings will be persistent,” said Tatjana Greil Castro, co-head of public markets at credit investor Muzinich & Co, pointing out that data were still skewed by major economies having abruptly shut down because of the coronavirus crisis last year.

Supply chain bottlenecks caused by the reopening of industries could also prove transient, she said. “I would expect these situations to normalise from September, which is when inflation data becomes more meaningful,” she added.

Analysts at TD Securities, however, pointed out that home rental prices were “showing some acceleration”, in a trend that they expected “to persist” and could advance the Fed’s plans to reduce the $120bn of monthly bond purchases it has used to boost financial markets since last March.

“Any upside surprise,” analysts at Barclays commented, would also likely trigger another round of US dollar appreciation “driven by expectations of a more hawkish” US central bank.

Fed chair Jay Powell is due to appear before Congress on Wednesday to give his views on monetary policy.

The dollar index, which measures the greenback against major currencies, was flat on Tuesday at around its highest since early April, having strengthened about 2 per cent since mid-June when Fed officials brought forward their expectations for the first post-pandemic rate rise by a year to 2023.

The euro, which has lost more than 2 per cent against the dollar in the past month, was steady at $1.1856. Sterling dipped 0.1 per cent to $1.3867.

Brent crude, the international oil marker, rose 0.5 per cent to $75.70 a barrel following a volatile session for commodities on Monday driven by concerns about the spread of the Delta coronavirus variant and slowing growth in China.

Hong Kong’s Hang Seng index rose 1.6 per cent after data showed China’s exports jumped by a better than expected 32.2 per cent in June from a year earlier. In Tokyo, the Topix share index added 0.7 per cent.

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