European stocks dip as investors weigh Fed tone against inflation pressures

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European equities dipped lower on Wednesday as investors balanced dovish comments by US Federal Reserve chair Jay Powell on future monetary policy with business surveys showing companies were struggling with inflation.

The Stoxx Europe 600 fell 0.2 per cent, remaining close to its all-time high, while London’s FTSE 100 index added 0.4 per cent. Futures markets signalled Wall Street’s S&P 500 would flatline at the start of New York trading while the technology-heavy Nasdaq Composite would inch 0.1 per cent higher to a new record.

After Fed officials last week brought forward their projections of the first post-pandemic rate rise by a year to 2023, Powell said on Tuesday the central bank would not act “pre-emptively” because “we fear the possible onset of inflation”.

US stock markets rose after the comments, with a follow-on rally in some Asian markets on Wednesday. Hong Kong’s Hang Seng index rose 1.8 per cent and South Korea’s Kospi added 0.4 per cent.

But the market narrative around inflation was “changing day to day”, said Fahad Kamal, chief investment officer at Kleinwort Hambros, “because the data itself is confusing”.

IHS Markit’s purchasing managers’ index for Japan, a gauge that collates executives’ responses to questions about new orders, hiring plans and input costs, dipped to a reading of 47.8 from 48.8 last month.

IHS blamed the fall in the index, where a reading of 50 separates business expansion from contraction, on continuing coronavirus restrictions as well as “severe supply chain pressures” following manufacturing bottlenecks and rising commodities prices.

The eurozone version of the same index rose to a 15-year high of 59.2 points, although it also found “a record increase in manufacturers’ material prices”, accompanied by “the steepest increase in service sector costs since July 2008”. The US index will be released later on Wednesday.

Powell has long maintained that inflation is transitory as industries reopen from coronavirus shutdowns. The headline rate of US consumer price rises hit 5 per cent in the 12 months to May. But the Fed chair told Congress on Tuesday that the central bank would wait for “actual evidence of actual inflation” before tightening monetary policy.

The Fed has bought about $120bn of bonds each month since March last year to steady financial markets through the pandemic and has signalled its readiness to debate reducing these purchases.

“Markets’ sole worry is whether the Fed prints indefinitely and keeps real [interest] rates negative,” said Charles Gave of research boutique Gavekal. “It suggests that money managers, as in Japan in the late 1980s, think that stock and bond values depend on central bank policy.”

Elsewhere in the markets, the yield on the benchmark 10-year US Treasury bond was steady at 1.478 per cent. Germanys’ equivalent Bund yield was also unmoved at minus 0.161 per cent.

The dollar index, which measures the greenback against major currencies, traded flat at close to a two-month high. The euro was steady against the dollar at $1.1935. Sterling gained 0.2 per cent to $1.3979.

Brent crude, the international oil benchmark, rose 0.8 per cent to $75.43, its highest level since October 2018, after demand recovered while oil-producing nations restricted supplies.

Contracts for delivery in later years are still trading at a discount, partly due to uncertainty around when global demand might peak or supplies improve. 

Additional reporting by David Sheppard in London

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