European stocks advance after dovish signals from Fed officials

European stocks rose on Tuesday, following the lead of Asian markets, as investors welcomed comments from Federal Reserve officials suggesting US interest rates may be nearing their peak.

Europe’s region-wide Stoxx 600 gained 0.3 per cent in early trading, while France’s Cac 40 rose 0.5 per cent. They were helped by comments from Atlanta Fed president Raphael Bostic that inflation could return to target without raising rates further, and from San Francisco Fed president Mary Daly that the Fed was nearing “the last part” of its cycle. 

However, London’s FTSE 100 fell 0.4 per cent after data showed UK wage growth accelerated more than expected in the three months to May. 

Evidence of the labour market’s resilience to tighter monetary conditions meant “pressure on the [Bank of England’s Monetary Policy Committee] to continue increasing rates in August will be intense,” said Martin Beck, chief economic adviser to the EY Item Club, adding that a further rate rise in September was now firmly on the cards. 

James Smith, developed market economist at ING, said the BoE might feel forced to opt for a jumbo half percentage point rise next month. “If there’s a sliver of good news for policymakers, it’s that there are further signs that the UK’s worker shortage crisis is becoming less acute,” he said.

Sterling strengthened 0.3 per cent against the dollar, rising to a 15-month high of $1.289. Two-year gilt yields, which closely track interest rate expectations, fell 0.09 percentage points to 5.272 per cent, however, as traders trimmed slightly the level at which they expect UK rates to peak next year.

Asian stocks made headway after Chinese officials on Monday said measures designed to support the property sector would be extended until the end of 2024. Hong Kong’s Hang Seng index added 1 per cent, China’s CSI 300 rose 0.7 per cent and South Korea’s Kospi rose 1.7 per cent. Japan’s Topix fell 0.3 per cent, however.

Inflation and producer prices in the world’s second-biggest economy fell in June, meanwhile, suggesting China’s post-lockdown recovery was “brief at best and that its growth story is faltering”, according to analysts at Liberum.

Contracts tracking Wall Street’s benchmark S&P 500 were down 0.1 per cent, while those tracking the tech-heavy Nasdaq 100 rose 0.1 per cent ahead of the New York open.

Those moves come ahead of fresh consumer price inflation data on Wednesday, which is expected to show that headline inflation was 3.1 per cent in June, year on year, according to economists surveyed by Bloomberg. 

Additional reporting by Mary McDougall in London

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