US equity futures steady before CPI; European stocks decline

BLOOMBERG

US equity futures traded little changed as traders awaited inflation data for clues on whether policy makers will keep rates higher for longer. Europe’s Stoxx 600, meanwhile, retreated 0.7% as stagflation concerns mounted. The pound extended declines to a three-month low after the UK economy shrank at the quickest pace in seven months. Crude prices jumped after warnings from the International Energy Agency (IEA).
Markets were looking to US price data on Wednesday that may show a third month of subdued core inflation, bolstering the case for the Federal Reserve to cease rate increases, according to Bloomberg Economics. That contrasts with the challenges faced in Europe as traders ramp up bets the European Central Bank will hike rates on Thursday amid growing concerns about persistently high inflation, while UK data stoke recession fears.
“All eyes are on US core CPI later today,” said Chetan Seth, a strategist at Nomura Holdings Inc. in Singapore. “With oil up more than 10% in just over two weeks, stock investors would be hoping not to see a punchy inflation reading tonight as it might give support to the theme of higher-for-longer Fed rate.”
Another tepid advance for prices excluding food and energy of 0.2% in August would probably be more important to Fed officials than an energy-driven rebound in the overall consumer price index, which may have risen 0.6%, Bloomberg economists wrote.
Crude gained after the IEA warned supply cuts will drive volatility. West Texas Intermediate climbed for a second day and Brent extended gains above $92 per barrel as the IEA said production cuts will create a “significant supply shortfall.” Treasury two-year yields, which are more sensitive to Fed policy than longer maturities, stayed above 5%, while their 10-year peers held at 4.29%. The dollar was little changed against its Group-of-10 peers ahead of the CPI numbers.
“US inflation has become predictable and is on the right path — the markets have already assimilated the idea that rates will need to remain high until at least the second half of 2024,” said Susana Cruz, a strategist at Liberum Capital. “In Europe, we see a higher level of uncertainty.”

European Woes
Markets in Europe were looking past the US data to the ECB’s too-close-to-call meeting for Thursday. After reports that the ECB’s new economic estimates will show an inflation forecast for 2024 above 3%, traders upped wagers to a 70% chance the central bank will raise rates at the meeting, compared with a 20% probability earlier this month.
The German two-year yield — among the most sensitive to monetary policy — rose four basis points to 3.17%, the highest level since mid-August. The European stock benchmark briefly pared declines, as Volvo Car AB, Renault SA and Volkswagen AG rallied after the European Union said it was launching an investigation into Chinese subsidies for electric vehicles.