Luxury sector lifts European shares as markets await U.S. CPI test

[August 10, 2023]  By Samuel Indyk and Ankur Banerjee

LONDON (Reuters) - European stock markets rose on Thursday, helped by gains in luxury brands after China eased some pandemic-era restrictions, while the dollar slipped ahead of U.S. inflation data that could influence the Federal Reserve's policy path.

Economists polled by Reuters expect July U.S. consumer price inflation to rise slightly to an annual 3.3%, while the core rate, which excludes the volatile food and energy segments, is forecast to rise 0.2% in July, for an annual gain of 4.8%.

"We're going to see our first rise in headline inflation after 12 consecutive months of falling prices," said Ben Laidler, global markets strategist at eToro.

"It will be a test of the goldilocks narrative which has supported the rally, which is that inflation will come down and allow interest rates to fall," Laidler added.

Markets are pricing in a more than 50% chance that the Fed is done with interest rate hikes this year, the CME FedWatch tool shows, as inflation moderates and the prospect of a soft landing increases.

The pan-European benchmark STOXX 600 rose 0.6% in early European trade, supported by gains in the luxury sector after China lifted a ban on group tours in the United States and other key markets.

Winners included LVMH, which rose 2%.

France's CAC 40 - which has a high weighting of luxury names - outperformed in Europe, rising 1.1%, while Germany's DAX gained 0.5% and Britain's FTSE 100 was up just 0.1%, weighed by a number of large-cap companies going ex-dividend.

CHINA WOES

Asian stocks remained pinned near a two-week low, still reeling from China's slip into deflation and an announcement of a U.S. ban on investments in China in sensitive technologies like computer chips.

MSCI's broadest index of Asia-Pacific shares outside Japan was last down 0.1% and looked set to log a second straight week of losses. A technology sub-index fell to its lowest in over two months.

Chinese data on Wednesday showed deflation at the consumer-price level and further declines for factory-gate prices in July, exacerbating concerns about the sputtering nature of the post-pandemic recovery.

China is the first G20 economy to report a year-on-year decline in consumer prices since Japan's last negative headline CPI reading in August 2021.

A woman walks past an electric board showing Nikkei index and exchange rate between Japanese Yen and U.S. dollar outside a brokerage at a business district in Tokyo, Japan January 4, 2023. REUTERS/Kim Kyung-Hoon

It highlights "the need for more fiscal support, if Beijing wants to avoid the prospect of a deflationary trap," said Rodrigo Catril, senior currency strategist at National Australia Bank.

In currency markets, the dollar index, which measures the U.S. currency against six peers, eased 0.3%. The Japanese yen weakened to a one month low of 144.135 per dollar, heading closer to the psychologically key 145 level.

Meanwhile, the yield on 10-year Treasury notes was little changed at 4.0127%, having dipped on Wednesday after a well-received 10-year note auction, with markets on edge due to a heavy bond supply over the coming quarter.

"We've got $1 trillion coming down the pipe over the next three months," eToro's Laidler said.

"Any sign that markets are absorbing that well, which we got the first signs of yesterday, will be very well taken."

Bond strategists polled by Reuters expect U.S. Treasury yields to fall in the coming months, with the median forecast for the 10-year Treasury note yield at 3.60% in six months.

Oil prices rose to their highest since November 2022, continuing to benefit from extensions to output cuts by Saudi Arabia and Russia.

U.S. crude was last up 0.3% to $84.61 per barrel and Brent was at $87.82, up 0.3% on the day. [O/R]

Eyes were also on European gas prices after they jumped as much as 35% on Wednesday, hitting their highest level since June 15 after news of possible strikes at Australian liquefied natural gas (LNG) facilities sparked concerns over cargoes moving to Asia.

On Thursday, the front-month Dutch contract was down 12% to 37 euros per megawatt hour, trimming around half of the previous day's gain.

(Reporting by Samuel Indyk and Ankur Banerjee; Editing by Edwina Gibbs, Sam Holmes and Susan Fenton)

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