(Bloomberg) — European stocks wavered amid a growing realization that policy makers are likely to stay hawkish for the coming months. German government bonds fell as traders braced for fresh inflation data.
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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.”
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The next pressure point could come at 1pm 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 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 labor market and that’s where it just becomes a real predicament for the Fed.”
Key events this week:
Eurozone S&P Global Eurozone Manufacturing PMI, Wednesday
US construction spending, ISM Manufacturing, light vehicle sales, Wednesday
Eurozone CPI, unemployment, Thursday
US initial jobless claims, Thursday
Eurozone S&P Global Eurozone Services PMI, PPI,…