European stocks rise ahead of eurozone inflation data report

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European stocks rose at the open on Friday ahead of eurozone inflation data which is likely to set the tone for future interest moves in the bloc.

The pan-European Stoxx 600 added 0.4 per cent at the opening bell, extending gains from the previous day, while France’s Cac 40 rose 0.5 per cent and Germany’s Dax advanced 0.3 per cent. 

Indices have made moderate gains in the first half of 2023, as investors have bet that inflation would slow and the European Central Bank’s historic tightening campaign would peak. London’s FTSE 100, which has trailed other benchmarks in Europe this year, rose 0.2 per cent.

Markets readied for the latest eurozone inflation report on Friday, which is expected to show that consumer price inflation had slowed to 5.6 per cent in June, from 6.1 per cent in the previous month, according to a Reuters poll of economists. 

But the closely watched measure of core inflation, which strips out volatile food and energy prices, is expected to have increased over the same period, pushing the ECB to continue raising interest rates at the risk of slowing the economy. 

Derivatives markets are predicting that the ECB will most likely raise its benchmark deposit rate by 0.25 percentage points to 3.75 per cent in July, but are also factoring in the chance of a larger half-point increase. 

Meanwhile, contracts tracking Wall Street’s benchmark S&P 500 added 0.1 per cent and those tracking the tech-focused Nasdaq 100 gained 0.3 per cent ahead of the New York open. 

The yield on US government debt ticked up in the previous session, after surprisingly strong data boosted expectations that the Federal Reserve will need to raise interest rates further to tame inflation.

Yields on the policy-sensitive two-year Treasuries steadied at 4.89 per cent on Friday, their highest level since the start of March, while those on the benchmark 10-year notes were flat at 3.85 per cent. Bond yields rise as prices fall. 

“Yesterday has highlighted the degree to which the credibility of the Fed’s higher-for-longer narrative hinges on the data. If activity refuses to lie down yields can only rise further”, said Padhraic Garvey, Americas regional head of research at ING. 

Investors turned their attention to the US core personal consumption expenditure price index, coming out later on Friday, which is expected to have remained at 4.7 per cent in May, unchanged from the previous month. 

China-related equities made moderate gains, with the CSI 300 index gaining 0.5 per cent and Hong Kong’s Hang Seng up 0.2 per cent.

Earlier in the day, China released official purchasing managers’ indices for June showing a contraction in factory activity and weaker than expected growth in services, bolstering calls for Beijing to enact further stimulus measures.

The renminbi added 0.06 per cent against the dollar, after briefly slipping to its weakest point since November.

“The softer momentum means more policy support is needed to reinvigorate the economy,” analysts at HSBC said.