European shares and US futures turn higher as investors weigh rate rise outlook

European shares and Wall Street stock futures turned higher on Monday, after losses in the previous session when a hot US jobs report added to expectations of aggressive interest rate rises by the Federal Reserve.

The regional Stoxx Europe 600 gained 0.8 per cent, with the FTSE 100 up 0.5 per cent. Futures contracts tracking the US blue-chip S&P 500 index added 0.6 per cent. In Asian markets, Hong Kong’s Hang Seng index slipped 0.8 per cent.

Those moves came after a labour report for the world’s largest economy on Friday showed US unemployment at a 50-year low, with employers adding 528,000 jobs in July — more than double the 250,000 anticipated by economists.

That report preceded a closely watched consumer price index report due on Wednesday. Economists polled by Reuters expect US headline inflation to have increased 0.2 per cent month over month from June to July, down from 1.3 per cent. Core CPI, which strips out volatile categories including food and petrol, is expected to have risen 0.5 per cent.

The S&P 500 fell 0.2 per cent on Friday as traders anticipated that the stronger than expected jobs data would encourage the US central bank to lift interest rates further.

In commodities, Brent crude fell 0.7 per cent to $94.27 a barrel. That decline came after the international oil benchmark last week posted its biggest weekly drop since April 2020.

“We are in an environment where central bankers have a tough choice: high inflation or the risk of recession. Faced with that choice, central bankers are likely to choose recession,” said Bill Papadakis, a macro strategist at Lombard Odier.

Central banks have in recent weeks shown their willingness to tackle inflation robustly, with the Bank of England, European Central Bank and Federal Reserve all introducing sizeable rate rises despite signs of an economic slowdown.

Trading in federal funds futures shows that markets are pricing in the possibility of a third consecutive 0.75 percentage point rate rise when policymakers at the Fed meet in September, although Deutsche Bank analysts noted that there would be two further CPI releases before the Fed’s next meeting.

“The monster payrolls report on Friday . . . finally got the message through that the narrative of a dovish Fed pivot . . . was exceptionally premature,” they wrote in a note.

Concerns over interest rate rises pushed US stocks lower on Friday, but the blue-chip S&P 500 index gained 0.4 per cent for the week. With the tech-heavy Nasdaq Composite also up 2.2 per cent for the week, this marked the first time since the start of April that both indices made three consecutive weekly gains.

In government bond markets, the yield on the 10-year German Bund fell 0.06 percentage points to 0.9 per cent, as the benchmark debt instrument’s price increased. Bond yields fall when their prices rise.

After the dollar made gains on Friday following the jobs report, the greenback slipped 0.3 per cent against a basket of six other major currencies.