European shares edge down as traders contemplate inflation outlook

European stocks edged lower on Thursday after a relief rally in the prior session, powered by US inflation data coming in no worse than feared, gave way to questions about how long it would take for surging price rises to moderate.

The Stoxx 600 equity gauge opened 0.2 per cent lower. The European index closed Wednesday’s session 0.6 per cent higher in response to a 7 per cent annual gain in US consumer prices that investors calculated did not speed up the Federal Reserve’s timetable for withdrawing its pandemic-era monetary stimulus.

London’s FTSE 100 fell 0.1 per cent, after rising 0.8 per cent on Wednesday.

Traders continue to expect the Fed, whose monetary policy decisions affect funding costs and stock market valuations worldwide, to raise its main funds rate three to four times this year to around 1 per cent, after tethering it close to zero from March 2020.

This relatively benign outlook for funding costs is based on assessments that US inflation, driven by rebounding energy prices and bottlenecks in supply chains disrupted by coronavirus, will soon peak.

“People like the comfort blanket of what feels like the mathematical certainty that a 7 per cent inflation rate cannot continue,” said Sunil Krishnan, head of multi-asset funds at Aviva Investors.

But this was preventing investors from “asking the tough questions,” he added, about how far US inflation would fall and the possibility of the Fed needing to raise interest rates beyond what markets currently expected.

“If we are looking at 3.5 per cent inflation by the end of the year, the Fed will still have a lot of wood to chop,” he said.

“CPI was expected to be bad and therefore the ability to shock was relatively low,” added Deutsche Bank strategist Jim Reid.

“Most forecasters think the peak for inflation is sometime soon, but the pace of the glide path is open to debate.”

Wall Street stock markets rose after the inflation data before ending Wednesday’s session with muted gains. In Asia, Hong Kong’s Hang Seng index drifted 0.1 per cent lower on Thursday while the Nikkei 225 in Tokyo lost 1 per cent.

The yield on the 10-year US Treasury note rose by about 0.03 percentage points to 1.75 per cent as the price of the benchmark government debt instrument fell.

Prices of eurozone government bonds also softened in response to lingering questions over inflation, which erodes investors’ real returns from fixed interest securities’ income payments. Germany’s 10-year Bund yield added about 0.02 percentage points to minus 0.04 per cent while Italy’s equivalent debt yield rose 0.03 percentage points to 1.359 per cent.

The dollar index, which measures the US currency against six others, dipped just under 0.3 per cent after dropping to its lowest point since November earlier on Thursday morning.

Brent crude, the oil benchmark, slipped 0.1 per cent lower to $84.57 a barrel.