European Shares Rally Most In Five Weeks As U.S. Inflation Cools

(Bloomberg) -- European stocks rose the most since early June as a sharp cooling in US inflation stoked optimism the Federal Reserve can wrap up its rate hikes soon. Chip stocks jumped.

The Stoxx 600 Index was up  by the close. ASML Holding NV and other semiconductor-related stocks rallied as Jefferies analysts said the sector had embarked on a new AI-fueled upcycle after more than a year in the doldrums. Mining stocks also outperformed, while drugmakers and personal care shares lagged.

The latest figures showed US inflation decelerated last month to the slowest pace in more than two years, indicating more success for a central bank that's been bearing down on price pressures. The chances of an additional Fed rate increase after this month slipped to well below 50%.

“This is starting to be convincing in terms of inflation deceleration,” said Arnaud Girod, head of economics and cross-asset strategy at Kepler Cheuvreux. “I think that the expectation of a 25 basis-point-hike in November can de dumped. This is putting risk-free rates under pressure. We're getting close to the pivot.”

Europe's benchmark index is attempting a recovery from last week's decline as investors also weigh early corporate earnings reports. JD Wetherspoon Plc rallied after the UK pub operator's trading update, with Goodbody noting that the outlook for fiscal 2024 seems better than expected. About You Holding SE soared by the most on record as it reaffirmed its revenue forecast for the full year.

Equity markets are already displaying a degree of calm that reflects investor optimism that inflation is now broadly under control — at odds to the stress seen in bond markets. Still, the outlook for further gains remains clouded after a strong first-half rally, strategists say.

“Earnings are likely to fall and the discount rate is likely to remain relatively high,” said James Athey, investment director at Abrdn. “That means neither profits nor multiples should save the market from a ready reckoning.”

Barclays Plc strategist Emmanuel Cau said the second-quarter earnings season is expected to be mixed. Still, “so long as earnings and guidance don't disappoint much, we think stocks can continue to grind higher through the summer,” he wrote in a note.

Here's what other market participants are saying about US inflation:

• Mathieu Racheter, head of equity strategy at Bank Julius Baer: “Solid inflation print across the board — this will bring expectations about further rate hikes beyond the July meeting down. We remain constructive on equities, especially long-duration/growth sectors (IT, communications) which we expect to continue to outperform. Seems to be a pivotal moment for the Fed debate.”
• Brian Jacobsen, chief economist at Annex Wealth Management: “Turning the hawkish hold into a pregnant pause might not be a bad idea. The problem with forward guidance is that a lot can change between the talk and the action. Chair Powell has been insistent that they need to hike a little bit more, but the data have been coming in to the downside with jobs and with inflation. It shows that they're flying blind.”
• Evgenia Molotova, senior investment manager at Pictet Asset Management: “I don't think the Fed will raise rates any more this year, but equally don't think they will cut. And equities will continue to perform, in my view.”

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--With assistance from Michael Msika, Ksenia Galouchko and Allegra Catelli.

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