Investors stand pat ahead of U.S. inflation data

[May 31, 2024]  By Huw Jones

LONDON (Reuters) -Investors kept their powder dry ahead of key U.S. inflation data on Friday, with hopes for a cut in euro zone borrowing costs next week still intact despite an uptick in prices sending German government bonds higher.

Oil and the dollar were little changed ahead of the U.S. data at 1230 GMT, before the opening bell on Wall Street.

U.S. stock index futures were weaker, though the opening tone is set to be determined by the Commerce Department's publication of the monthly U.S. personal consumption expenditures price index, widely viewed as the Fed's preferred inflation gauge.

Economists estimate it rose 2.7% in April from a year ago; the Fed targets a 2% pace, with its next rate-setting meeting mid-June.

Euro zone inflation rose more-than-expected in May, data showed on Friday, though analysts said this was unlikely to stop the European Central Bank from lowering borrowing costs next Thursday, but may cement the case for a pause in July.

The euro zone data sent German government bond yields to their highest in over six months.

"The big driver in the market at the moment is the same old story of when is the Fed going to pivot and start cutting rates," said Mark Ellis, CEO of Nutshell Asset Management.

"Although stock markets have performed strongly in May, just in the last week it seems very stressed. I'm expecting that to subside today, and seasonally the first week of June is pretty good for markets," Ellis added.

The MSCI All Country Stock index was flat at 781.52 points, down nearly 2% on the week after yields on government bonds rose, though the benchmark is still up more than 7% for the year.

In Europe, the STOXX index of 600 companies was also steady and headed for a second week of declines, though was still likely to show gains for May.

Ellis said expectations that the ECB will move before the Fed in cutting rates, the opposite to what has historically happened, is largely priced into markets.

Analysts said they expect little impact on Wall Street from news that Donald Trump has become the first U.S. president to be convicted of a crime ahead of a November vote when he will try to win back the White House from Democratic President Joe Biden.

ASIA WEAKER

MSCI's broadest index of Asia-Pacific shares outside Japan was down 0.5%. The index was set for a gain of about 2.7% in May, rising for the fourth straight month.

A passerby walks past Japan's Nikkei stock prices quotation board outside a brokerage in Tokyo, Japan February 19, 2024. REUTERS/Issei Kato/File Photo

China stocks were down 0.4%, while Hong Kong's Hang Seng index was off 0.8%.

China's manufacturing activity unexpectedly fell in May, an official factory survey showed on Friday. The soft outcome kept alive calls for fresh stimulus as a protracted property crisis continues to weigh on businesses, consumers and investors.

Traders are also looking over their shoulders for any hints of intervention from the Tokyo authorities as the Japanese yen flirts with levels that led to suspected bouts of intervention late in April and early this month.

The yen was last at 157.220 per dollar, having touched four-week lows of 157.715 on Wednesday. The currency weakened to its lowest in 34 years at 160.245 on April 29, sparking at least two suspected rounds of interventions. Data on Friday showed core consumer prices in Japan's capital rose 1.9% in May on rising electricity bills but price growth excluding the effect of fuel eased, heightening uncertainty on the timing of the central bank's next interest rate hike.

The dollar index, which measures the U.S. currency against six rivals, was trading at 104.84, on course for 1.4% decline in May, snapping a four-month winning streak.

The euro was slightly firmer at $1.0849 ahead of euro zone inflation data for May.

In commodities, oil prices eased after a surprise build in U.S. gasoline stocks weighed on the market. Brent futures was down 0.4% at $81.51 a barrel, while U.S. West Texas Intermediate (WTI) crude was slightly firmer at $78.03. [O/R]

Gold, set for a fourth straight monthly gains, was trading at $2,344 per ounce.

(Editing by Shri Navaratnam, Stephen Coates and Giles Elgood; Editing by Sharon Singleton)

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