European stocks edged higher on Friday, as investors balanced data showing an easing in inflation in the world’s biggest economy against hawkish warnings from the Federal Reserve.
The regional Stoxx Europe 600 opened 0.6 per cent higher and London’s FTSE added 0.4 per cent after UK chancellor Jeremy Hunt announced £30bn of spending cuts and £25bn of tax rises in his Autumn Statement to the House of Commons.
British households are set for the steepest fall in living standards on record and the highest tax burden since the second world war, with the Office for Budget Responsibility predicting inflation will average 7.4 per cent in 2023.
The moves came after US equities fell on Thursday, prompted by a warning from James Bullard, president of the St Louis Fed, that previous interest rate rises had “only a limited effect on observed inflation”. The central bank’s main policy rate could increase to between 5 and 5.25 per cent at least, Bullard said, above the level priced in by markets. Contracts tracking Wall Street’s benchmark S&P 500 and the tech-heavy Nasdaq Composite were flat.
The market consensus remains that the Fed would raise rates by 0.5 percentage points when it next meets in December, which would end a run of four consecutive 0.75 percentage-point increases.
Bullard’s comments sparked a slight sell-off in US government bonds, though the two-year Treasury yield, which is particularly sensitive to interest rate expectations, was flat on Friday at 4.46 per cent. The benchmark 10-year Treasury yield fell 0.008 percentage points to 3.76 per cent as the price of the security inched higher.
The dollar index, which tracks the currency against a basket of six of its peers, was flat.
Jim Paulsen, chief investment strategist at The Leuthold Group, a research company, said a combination of the lagged impact of contractionary monetary and fiscal policies, the dollar’s strength and the growing gap between the yields on two-year and 10-year Treasuries was set to “significantly slow” real economic growth in the US.
“By the first quarter of next year, our guess is that the primary consensus concern will be recession rather than inflation,” Paulsen said.
Asian equities fell on Friday, adding to losses earlier in the week. Hong Kong’s Hang Seng index closed down 0.3 per cent, China’s CSI 300 slipped 0.5 per cent and South Korea’s Kospi rose 0.1 per cent. Japan’s Topix finished flat.