European shares rise as inflation data report cheers investors

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European shares rose on Friday after lower-than-expected eurozone inflation data raised investors’ hopes that interest rates across the bloc will soon hit their peak.

The pan-European Stoxx 600 added 0.8 percent, extending morning gains, while France’s CAC 40 rose 0.9 percent and Germany’s DAX 1.1 percent.

US futures also saw gains as the first half of the year nears its end. Contracts tracking Wall Street’s benchmark S&P 500 rose 0.3 percent and those tracking the tech-focused Nasdaq 100 rose 0.5 percent ahead of the New York open.

The Nasdaq is poised to record its third-best first half, according to data from Bespoke Investment Group, as investors piled into stocks related to artificial intelligence.

Gains in Europe were boosted by the latest report on eurozone inflation, which came in lower than economists expected. The annual rate of price rise slowed to 5.5 percent in June from 6.1 percent in the previous month, which was 0.1 percentage point below analysts’ expectations.

A closely watched measure of core inflation, which strips out volatile food and energy prices, was 5.4 percent, 0.1 percentage point below forecast. The moves have raised hopes that the European Central Bank may halt its policy of aggressively raising rates to bring down inflation earlier than expected.

Derivatives markets adjusted their ECB policy predictions, betting heavily on a quarter-point rate hike in July, and reducing the chances of a larger half-point hike. The central bank last raised its benchmark deposit rate to 3.5 per cent in June.

European blue-chip indices gained in the first half of the year as investors hoped inflation would slow and the ECB’s historic tightening campaign would peak.

London’s FTSE 100, which has lagged other benchmarks in Europe this year, rose 0.7 percent.

Yields on US government debt rose in the previous session after surprisingly strong data raised hopes that the Federal Reserve would need to raise interest rates further to tame inflation.

Yields on policy-sensitive two-year Treasuries rose 0.05 percentage points to 4.92 percent on Friday, their highest since early March, while yields on benchmark 10-year notes rose 0.03 percentage points to 3.88 percent. Bond yields rise as prices fall.

“Yesterday highlighted the extent to which the credibility of the Fed’s higher-than-tall narrative depends on the data. If activity refuses to ease, yields can only rise further,” said Padharc Garvey, head of regional research for the Americas at ING.

Investors turned their attention on Friday to the upcoming US core personal consumption expenditure price index, which is expected to rise 4.7 percent in May, unchanged from the previous month.

Shares related to China advanced modestly, with the CSI 300 index adding 0.5 per cent and Hong Kong’s Hang Seng adding 0.1 per cent.

Earlier in the day, China released the official purchasing managers’ index for June, which showed a contraction in factory activity and weaker-than-expected growth in services, fueling calls for Beijing to take more stimulus measures.

The renminbi gained 0.2 percent against the dollar, after slipping to its weakest point since November.

“The softer pace means more policy support is needed to reinvigorate the economy,” HSBC analysts said.