European Stocks Stabilize as Bond Markets Rebound, Focus on Inflation Data

European stock markets found some stability on Thursday as bond markets recovered from the previous day’s sell-off, which was driven by expectations of prolonged higher interest rates due to persistent inflation.

The pan-European STOXX 600 index edged up nearly 0.2%, following a decline of over 1% on Wednesday. Germany’s DAX, France’s CAC, and Britain’s FTSE 100 also posted modest gains of 0.1%-0.2%.

Market sentiment was boosted by the rebound in bond markets, as Germany’s 10-year bund yield retreated from a six-month high of 2.687% to 2.664%.

Investors are closely watching the upcoming eurozone inflation reading on Friday, following a slightly higher-than-expected German inflation figure for May. While a higher reading is unlikely to deter the European Central Bank (ECB) from cutting interest rates next week, it could influence future policy decisions.

Markets are currently pricing in around 60 basis points of easing from the ECB this year, implying two quarter-point rate cuts and a 40% chance of a third.

The main focus for markets this week remains Friday’s U.S. core personal consumption expenditures (PCE) price index report, the Federal Reserve’s preferred inflation measure. Expectations are for it to remain unchanged on a monthly basis.

However, analysts caution that a softer-than-expected PCE report is unlikely, given the recent data pointing to sticky inflation. Any further rise in inflation could dampen risk appetite and weigh on markets.

U.S. Treasury yields also eased on Thursday, retreating from the previous day’s 8 bps rise, partly due to a weak debt auction. The benchmark 10-year yield stood at 4.5898%, while the two-year yield was at 4.9601%.

Japanese government bond (JGB) yields reached fresh multi-year highs, fueled by growing expectations of further rate hikes by the Bank of Japan.

Overall, European stock markets are experiencing a period of cautious optimism as bond markets rebound and investors await critical inflation data releases from both the eurozone and the U.S. The potential for continued high inflation and subsequent monetary policy tightening remains a key concern for market participants.