European equities held steady, close to an all-time high, as investors waited on US inflation data on Friday that may pressure the Federal Reserve to rethink its ultra-loose monetary policies.
The Stoxx 600 rose 0.1 per cent in early dealings while the UK’s FTSE 100 was flat. US government bonds softened ahead of the inflation survey, which is expected to show core personal consumption expenditure (PCE) in the US rose to its highest in almost three decades last month. The yield on the 10-year US Treasury, which moves inversely to its price, added 0.02 percentage points to 1.589 per cent.
Core PCE, the Fed’s favoured measure of inflation that strips out volatile food and energy prices, is forecast to have risen 2.9 per cent year on year in April, its strongest annual rise since 1993.
Many economists believe inflation is being pushed higher by temporary factors as industries reopen following pandemic shutdowns last year. But analysts and investors will be alert for price rises that are broad enough to persuade the Federal Reserve, the world’s most influential central bank, to roll back its crisis-era monetary stimulus earlier than it currently expects to, in order to cool an overheating economy.
“We are probably going to see a rise in transitory elements,” said Samy Chaar, chief economist at private bank Lombard Odier. “Like hotels, cars, airline fares, for example, which are in catch-up mode.”
The US jobs market may be a more important barometer of long-run inflation, he added. “If the labour market is tightening you get wage pressure and that at some point feeds into price pressure as people adjust their consumption.”
Unemployment is running at 6.1 per cent in the US. Data later on Thursday is expected to show new jobless claims fell to a fresh pandemic-era low of 425,000 last week. Higher unemployment benefits and virus fears have led to labour shortages and prompted some US corporations to offer higher wages. Last month a McDonald’s franchise in Florida offered $50 payments to anyone who turned up for a job interview.
Meanwhile, Fed officials have shifted the tone of their communications from insisting it was too early to discuss cutting back the central bank’s $120bn in monthly bond purchases to opening a debate about reducing its crisis-era support for financial markets.
Randal Quarles, a Fed vice-chair, said on Wednesday that even after “discounting temporary factors”, the increase in US inflation since December would “prove sufficient” to merit a drawdown in asset purchases later in 2021.
In currencies, the euro ticked 0.1 per cent higher against the dollar to purchase $1.2205. Sterling also rose 0.1 per cent to $1.4132. The dollar index, which measures the greenback against major currencies, was steady at around its lowest point for 2021.
China’s onshore renminbi continued its march higher against the dollar, rising 0.3 per cent. One unit of the US currency now buys 6.375Rmb, the lowest amount in about three years.
Asian equities softened, with Japan’s Nikkei 225 and Hong Kong’s Hang Seng index both ending the session 0.3 per cent lower. Brent crude, the global oil benchmark, fell 0.6 per cent to $68.43 a barrel.