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European stocks touched new all-time highs and US government debt fell back as investors positioned themselves ahead of Wednesday’s release of inflation data from the world’s biggest economy.
The regional Stoxx 600 index rose 0.1 per cent, hitting another peak as European markets were boosted by strong earnings from the likes of Dutch lender ABN Amro. The bank’s stock rose 4.2 per cent.
The UK’s FTSE 100 also gained 0.5 per cent, led by energy and industrial stocks, as oil prices rebounded after sliding more than 9 per cent last week.
All eyes will be on the US as officials release monthly inflation data. Coming on the back of stronger than expected job creation numbers at the end of last week, a solid uptick in inflation will heighten concerns that the economic recovery is running hot and pile additional pressure on the US Federal Reserve to outline plans for tapering its $120bn in asset purchases per month.
Economists polled by Bloomberg forecast consumer prices to have ticked up 0.5 per cent in July compared with the previous month. On a year-on-year basis, the inflation rate is expected to have eased to 5.3 per cent, from 5.4 per cent in June.
“The breakdown will be very important so let’s see if more of the transitory inflation filters into non-Covid related sectors,” noted Jim Reid at Deutsche Bank.
Analysts at Morgan Stanley on Tuesday brought forward their forecast for the US central bank to begin tapering to December 2021. Jay Powell, Fed chair, has insisted that most of the inflation seen so far is a temporary consequence of the rapid reopening of economies following last year’s lockdowns. However, other policy committee members have made more hawkish statements this week, causing US Treasuries to fall back.
Yield on the benchmark US 10-year Treasury rose 0.03 percentage points on Wednesday to 1.37 per cent, approaching early July highs after ticking up nearly 20 basis points since last week’s six-month lows. Yields fall as prices rise. The yield on the equivalent German Bunds and UK gilts also ticked up.
Futures tracking US stock indices indicated that the blue-chip S&P 500 would drift lower by 0.1 per cent and the technology focused Nasdaq Composite by 0.3 per cent when markets open in New York. The S&P is about 1 per cent away from doubling its value from March 2020 lows, when rapid pandemic lockdowns threw global markets into chaos.
The US Senate voted through a bipartisan $1tn infrastructure package on Tuesday and a $3.5tn Budget on Wednesday, which will now go to the House when lawmakers return after summer recess later this month.
“The Biden administration’s expansionary fiscal policies should support economic growth and are positive for equity markets,” analysts at Credit Suisse wrote, but “stretched technical indicators and a potential tapering of bond purchases by the Federal Reserve pose near-term risks for markets”.