European Stocks Close at Record High on Cooling Inflation Data

(Bloomberg) — European stocks rose to a record high at the close as cooling inflation data in the region cemented expectations that interest rate cuts are coming. 

The Stoxx 600 Index added less than 0.1% to 525.04 by the close in London, bringing gains for the week to 1.3%. The index has rallied for the past four straight weeks, the longest streak since March, with investors growing increasingly confident that the European Central Bank will lower rates and that the global economy is continuing to grow. 

Economic data on Friday showed that euro-zone consumer prices rose 2.2% from a year ago in August, a significantly slower pace than July’s 2.6%. The positive inflation news will help sustain the upbeat mood evident at the Federal Reserve’s annual Jackson Hole gathering last week, with Chair Jerome Powell joining ECB and the Bank of England officials in firmly signaling that rates are headed down.

Over in the US, the Fed’s preferred measure of underlying inflation rose at a mild pace and household spending picked up in July, reinforcing policymakers’ plan to start cutting interest rates next month.

“This green light, indicating a favorable environment, supports a potential 25 basis points cut in September,” said Florian Ielpo, the head of macro research at Lombard Odier Asset Management. “To completely move away from the expectation of a larger, jumbo-sized cut, which some market participants still anticipate, we now need the upcoming ISM data and the job report to also reflect a resilient economy,” he added – which is due next week.

After a difficult start to August, European equities have roared back, with retail shares and telecommunication companies leading the way. Investors are pricing two or three more rate cuts this year. 

Still, there are risks to the inflation outlook, according to Executive Board member Isabel Schnabel. While data have broadly confirmed the ECB’s baseline outlook, bolstering confidence that the price target can be reached by the end of 2025, services inflation remains elevated and could yet hold back the overall retreat, Schnabel said Friday.

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–With assistance from Farah Elbahrawy.

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