European stocks followed Asia markets lower on Wednesday as traders nervously awaited the release of closely watched US inflation data, with a stronger than expected figure likely to raise the pressure on the Federal Reserve to continue increasing interest rates.
The region-wide Stoxx 600 fell 0.2 per cent and Germany’s Dax dropped 0.3 per cent, while London’s FTSE 100 slipped 0.1 per cent. In Asia, Hong Kong’s Hang Seng index fell 0.6 per cent and China’s CSI 300 lost 0.8 per cent.
The falls came ahead of the latest inflation report from the US Bureau of Labor Statistics, which is expected to show the consumer price index rose 0.4 per cent month on month in April, up from 0.1 per cent in March. The yearly increase is expected to remain steady at 5 per cent, after nine consecutive months of decline since hitting a peak last June.
Wary of stubbornly high inflation and trouble in the regional banking sector, the Federal Reserve last week raised its benchmark interest rate by a quarter of a percentage point to a new target range of 5 per cent to 5.25 per cent, the highest level since mid-2007.
US futures traded slightly higher after a down day on Wall Street in the previous session. Contracts tracking the benchmark S&P 500 and the tech-heavy Nasdaq 100 added 0.2 per cent and 0.1 per cent ahead of the New York open.
Though Wednesday’s CPI will be the main event, traders are also keeping an eye on political negotiations over the US debt ceiling. President Joe Biden yesterday implored Republicans to “take the threat of default off the table” after failing to reach a breakthrough in a meeting with congressional leaders.
“The debt ceiling issue is a very serious one but the markets are not reacting yet, and I stress yet”, said Mike Zigmont, head of trading at Harvest Volatility Management. “If the political brinkmanship gets too dicey, markets are going to freak out. If the US actually defaults, look out below.”
Francesco Pesole, FX strategist at ING, said there was now “growing concern that it might actually take a market sell-off in the equity or money markets to break the impasse”.
In Asia, China’s import volume contracted by the most in a year last month, while exports expanded at a slower pace than expected, heightening concerns over the pace of the country’s economic recovery since Beijing ditched strict zero-Covid measures in late 2022.
“The downturn in Chinese exports may still have some way to run before bottoming out later this year”, said Zichun Huang, China economist at Capital Economics.
“The effect of higher interest rates in developed economies is still feeding through, and jitters in the global banking system have caused credit conditions to tighten, which will weigh on economic activity”.