European stocks slip as investors bet on continued high US inflation

European stock markets dropped as traders anticipated 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 0.3 per cent, although it remained close to a record high driven by the region’s economic rebound from the coronavirus crisis. London’s FTSE 100 lost 0.5 per cent and Germany’s Xetra Dax drifted 0.2 per cent lower.

Futures markets signalled that Wall Street’s S&P 500 would trade flat in early New York dealings.

Inflation

Economists polled by Bloomberg forecast data released later on Tuesday to 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.

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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 (€62.91) a barrel on Tuesday, heading for its third consecutive day of gains.

US central bank officials in recent days have indicated their willingness to taper the $120 billion 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.”

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 1.343 per cent. Germany’s equivalent Bund yield rose 0.02 percentage points to minus 0.303 per cent.

Crackdown

The dollar index, which measures the US currency against six others, fell 0.2 per cent. Sterling gained 0.3 per cent against the dollar to $1.3873 after job vacancy data showed UK employers were rushing to hire new staff just as the government prepares to withdraw pandemic-related wage subsidies.

In Asia, Hong Kong’s Hang Seng index fell 1.4 per cent, after losing 1.5 per cent on Monday, amid a Chinese government crackdown on the tech and gaming industries and stress in the nation’s property market.

The Beijing government plans to break up payments giant Alipay while major Chinese property developer Evergrande is facing a debt crisis. Adding further pressure to the Chinese economy, the important export province of Fujian reported a new outbreak of the highly contagious Delta coronavirus variant.

Ms Chesworth characterised the fact that Western stock markets were not reacting more strongly to the situation in China as “bizarre.”

“I think of the number of times I’ve spoken to clients who are buying into a company because of its exposure to China, but we’re not seeing the reverse of this,” she said. – Copyright The Financial Times Limited 2021