European stocks, dollar rebound after China deflation jolt

Europe’s stock markets, the dollar and oil all had a spring back in their step on Thursday as a deflationary jolt from China made way for broader optimism ahead of what was set to be the Bank of England’s 12th straight rate rise later.

Hopes that the US Federal Reserve’s aggressive hiking cycle may be over at least was still feeding through following inflation data there on Wednesday, with the pan-European STOXX 600 index (.STOXX) up 0.5% and key borrowing costs inching down.

Sterling was seeing some profit taking after it had hit a one-year high and with the Bank of England poised to crank UK borrowing costs up another quarter point to 4.5% at 1100 GMT, reported Reuters.

“We think BoE rates will eventually get up to the 4.75%-5% level,” said Vanguard senior economist Shaan Raithatha citing Britain’s stubbornly high inflation numbers, especially core inflation which has been stuck around 6%.

“It feels like the BoE has been signalling since the end of last year that they are near the end (of the rate hike cycle) and want to pause, but inflation has remained sticky and the market has just continued to reprice expectations.”

In Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) had finished down 0.3%, reversing gains in the morning session, as concerns about weak demand in China weighed on sentiment.

China’s April consumer prices data rose at a slower pace and missed expectations, while factory gate deflation deepened, suggesting more stimulus may be needed to boost a patchy post-COVID economic recovery.

The consumer price index (CPI) in April rose 0.1% year-on-year, the lowest rate since February 2021, while the producer price index (PPI) fell at the fastest clip since May 2020, declining 3.6% year-on-year.

“Looking ahead, in year-over-year terms, we expect headline CPI inflation to accelerate modestly on continued economic recovery and PPI deflation to persist in the coming months,” Goldman Sachs analysts said in a note.

Markets were also watching the start of three days of Group of Seven (G7) finance leaders meetings in Japan that will seek to draw supply chains away from China - but also try to get its cooperation in solving global debt problems.