US and European stock markets gain on cooling inflation data

Expectations of higher interest rates could continue to pose risks for markets over the medium term, analysts warn

US prices cooled last month, indicating the central bank's interest rate increases are easing inflationary pressures. Reuters

Global stock markets ended the week mostly up, with bourses in the US and Europe gaining as official data showed inflation has been easing.

The Price Consumption Expenditures Price Index, a key inflation measure monitored by the US Federal Reserve, showed that prices cooled last month, indicating that the central bank's interest rate increases were easing pressures.

The index rose 3.8 per cent on an annual basis in May, down from 4.3 per cent a month in April. Core PCE, which excludes food and energy, rose 4.6 per cent on an annual basis, after a 4.7 per cent increase the previous month.

The report comes as Fed policymakers consider whether to issue another pause on interest rate increases after doing so earlier this month.

The stock market was also lifted by Apple, whose valuation topped $3 trillion on Friday, cementing its standing as the world's most valuable company.

At the close of trading, the S&P 500 rose 1.4 per cent and the Dow Jones Industrial Average added 0.8 per cent.

The tech-heavy Nasdaq Composite gained 1.45 per cent, to cap its best first-half performance in 40 years with a more than 31 per cent rise through the first six months of 2023.

For the week, the S&P 500 rose 2.3 per cent, the Dow added 2 per cent and the Nasdaq increased 2.2 per cent. Year-to-date, the indices are up 15.9 per cent, 3.8 per cent and 31.7 per cent, respectively.

"The US stock market could see some volatility and could remain under some pressure with attention turning again toward monetary policy," Ralph Ratterman, asset manager at DHF Capital, wrote in a note.

"The expectations of higher interest rates as expressed by the Federal Reserve could continue to constitute a source of risks for the market over the medium term."

In Europe, London's FTSE 100 settled 0.8 per cent higher, lifted by financial stocks, but posted a quarterly loss to snap two consecutive three-month periods of growth on inflation concerns and a hawkish tone from the Bank of England.

Investors also took note of the UK's tepid economic growth, with the Office of National Statistics reporting that gross domestic product inched up 0.1 per cent in the first quarter of 2023, narrowly avoiding a recession.

Elsewhere in Europe, Frankfurt's DAX closed up 1.3 per cent and Paris's CAC 40 settled 1.2 per cent higher, with investors still focused on inflation.

"Inflation is still high, and that means that the bank still has more work to do. The [European Central Bank] certainly can't afford to be overly dovish, as inflation in their projection is still high for the coming years in comparison to their previous projections," said Naeem Aslam, chief investment officer of Zaye Capital Markets.

The US stock market could see some volatility and could remain under some pressure with attention turning again toward monetary policy

Ralph Ratterman,
asset manager at DHF Capital

"But this matters less as the bank is more likely to adjust them as the data suggests new improvements. At the same time, the fact that projections are moving upward rather than downward isn’t the best news."

Earlier in Asia, the Shanghai Composite and Hong Kong's Hang Seng Index diverged, following data that showed China's economy slowed down, sparking concerns that Beijing may implement new steps to boost activity.

Tokyo's Nikkei 225 settled 0.1 per cent lower.

In commodities, oil prices settled higher on Friday but posted quarterly losses as the big drop in US crude oil inventories outweighed investor concerns that further interest rate rises and inflation will dent oil demand.

Brent gained 0.75 per cent, or $0.56, to close at $74.90 a barrel and posted a fourth straight quarter of declines. West Texas Intermediate rose 1.12 per cent, or $0.78, to settle at $70.64 a barrel to record a second consecutive quarter of losses.

Gold, meanwhile, gained $11.50 to settle 6 per cent higher at $1,929.40 an ounce, but still posted a quarterly loss, pressured by expectations of more interest rate hikes.