European stocks struggle for direction with rates in focus

BLOOMBERG

European stocks wavered amid a growing realisation that policy makers are likely to stay hawkish for the coming months. German government bonds fell as traders braced for fresh inflation data.
The Stoxx Europe 600 Index erased a small gain at the open to trade little changed. Futures for the S&P 500 and Nasdaq 100 clung to modest gains after a slew of data showed that China’s economy is on track for a stronger recovery.
Bonds in Europe extended their slump after hot inflation data caused a reassessment of rate expectations, picking up a theme that has dominated trading in a month where the Federal Reserve signalled its intention to ratchet rates higher than the market had been anticipating.
“February has poured cold water on hopes that policy makers may quickly tame inflation towards target,” Generali Investments strategists wrote in their monthly outlook. “We now have even higher peak rates in our books.”
The next pressure point could come at 1 pm London time, when Germany’s national CPI figures are published.
Bond traders no longer view the odds of a Fed rate cut this year as better than-even, a shift from what they were expecting just a month ago. Market expectations also see the European Central Bank (ECB) raising rates through February 2024, with a 4% ECB terminal rate fully priced.
“For the Fed, they want to make sure that they increase rates and do their job,” Mary Nicola, multi-asset portfolio manager at PineBridge Investments, said on Bloomberg Television. “They could continue to hike but they can continue to hike until it starts hurting and we start seeing cracks in the labour market and that’s where it just becomes a real predicament for the Fed.”
The Stoxx Europe 600 was little changed as of 9:55 am London time and S&P 500 futures rose 0.2%.
While Nasdaq 100 futures rose 0.3%, futures on the Dow Jones Industrial Average also climb 0.1%. The MSCI Asia Pacific Index rose 1.5% and the MSCI Emerging Markets Index also gains 2%.
The Bloomberg Dollar Spot Index fell 0.4% and the euro rose 0.7% to $1.0646.
While the Japanese yen rose 0.3% to 135.81 per dollar, the offshore yuan rose 1% to 6.8870 per dollar and the British pound also advances 0.4% to $1.2071.
The yield on 10-year Treasuries advanced two basis points to 3.94% and Germany’s 10-year yield advanced six basis points to 2.71%. Britain’s 10-year yield advanced four basis points to as much as 3.86%.