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European stocks make moderate gains as investors bet on slowing rates

European stocks made moderate gains at the open on Thursday after the Federal Reserve predicted the US economy would go through a “mild recession”.

The region-wide Stoxx 600 rose 0.3 per cent, Germany’s Dax was up 0.2 per cent, France’s Cac 40 added 1 per cent and London’s FTSE 100 was flat.

Traders took heart from minutes from the Federal Open Market Committee March meeting that showed officials predicting a “mild recession” starting later this year, before the economy recovers over the next two years.

Gains were capped after overnight economic data from the US showed headline inflation was down to 5 per cent, the lowest reading since July. However, core CPI, the measure preferred by the Fed because it strips out volatile food and energy prices, rose to 5.6 per cent.

Investors are weighing the impact of the data and the economy shrinking on the Federal Reserve’s next meeting in May. Investors have grown more confident that falling inflation will persuade the Fed to moderate the pace of interest rate rises to combat consumer price pressures.

Swaps markets predict a 70 per cent chance of a 0.25 percentage point increase over no change, according to data from Refinitiv.

In Europe investors are pricing in a more hawkish path from the European Central Bank, with nearly a two in three chance of a 0.25 percentage point rise and roughly a one in three chance of a larger half-point increase.

On Wednesday, governing council member Robert Holzmann said the ECB should raise rates by 0.5 percentage points as the “danger of currently doing too little and to fan inflation is bigger than the risk of doing too much”.

Futures contracts for the S&P 500 and the tech-heavy Nasdaq Composite showed positive momentum in pre-market trading, up 0.3 and 0.4 per cent respectively. US markets briefly jumped on Wednesday on news of the Fed minutes before the inflation news halted the momentum, with the former closing 0.4 per cent lower and the latter dropping 0.9 per cent.

“With the US economy cooling and a Fed pivot not imminent, we believe the environment for equities will remain challenging in the coming months,” said Mark Haefele, chief investment officer at UBS Global Wealth Management.

Later on Thursday European industrial production data, as well as US producer price index data and jobless claims will be released.

In debt markets, two-year US Treasuries were down 0.02 percentage points at 3.94 per cent, with 10-year contracts also down 0.02 percentage points at 3.39 per cent.

On Wednesday, yields on interest rate sensitive two-year Treasuries fell 0.09 percentage points to 3.97 per cent in the wake of the inflation data. Two-year German Bund yields fell 0.03 percentage points to 2.73 per cent, while 10-year yields fell 0.01 percentage points to 2.34 per cent.

Asian equities saw losses, with Hong Kong’s Hang Seng index down 0.2 per cent and China’s CSI 300 down 0.7 per cent.

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