Stocks mixed, sterling weighed as UK inflation slows

SYDNEY, July 19 (Reuters) – Stock markets were mixed on Wednesday with growth concerns dragging down China while elsewhere futures rose after British inflation came in surprisingly soft for once and U.S. data stoked hopes the world’s biggest economy can avoid recession.

Headline British CPI fell to 7.9% year-on-year in June, against expectations for 8.2%. Core inflation fell to 6.9% from a three-decade peak of 7.1%. Sterling dropped 0.6% to $1.2962 and FTSE futures rose 0.5%.

Earlier MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) was dragged 0.6% lower by a 1.2% drop for the Hang Seng (.HSI).

Japan’s Nikkei (.N225) rose 0.9% and touched a two-week peak. U.S. futures were flat and European futures rose 0.3%.

Headline U.S. retail sales data came in below forecasts, but core sales which exclude food, fuel and building materials, rose a solid 0.6% in June and had economists lifting gross domestic product (GDP) forecasts.

“You can sense the probability of a soft landing,” said Tapas Strickland, head of market economics at National Australia Bank in Sydney. “Core inflation is coming down and there’s momentum from the consumer.”

The Atlanta Fed’s influential GDP Now tracker has the U.S economy growing an annualised 2.4% in the second quarter, slightly higher than its prediction of 2.3% a week earlier.

Big U.S. bank shares rose sharply on strong results. Microsoft (MSFT.O) shares surged 4%, adding $100 billion in market value, after the company announced charges for artificial intelligence features in office software, a big first step in monetising AI’s potential.

Tesla (TSLA.O), Goldman Sachs (GS.N) and Netflix (NFLX.O) report earnings on Wednesday.

INFLATION RECEDES

British inflation is the latest downside surprise in major economies, following Canada on Tuesday and the United States last week. While it is still uncomfortably high, a tentative rally in gilts can extend if traders reckon fewer rate hikes are in store.

As well as slipping on the dollar, sterling slipped 0.6% to a 1-1/2 month low of 86.66 pence to the euro .

It was a different story in New Zealand, where inflation came in at 6% year-on-year, slower than a reading of 6.7% a month earlier, but above expectations. It drove up two-year swap rates as markets priced in rates staying higher for longer.

The New Zealand dollar jumped to $0.6315 before slipping back to $0.6259 as the U.S. dollar edged higher with a little help from a weaker euro.

European Central Bank (ECB) governing council member Klaas Knot said on Tuesday that hikes beyond next week’s meeting were “by no means a certainty,” knocking the euro from a 17-month high. It was last trading at $1.2220.

“This is perhaps the first time a known hawk within the ECB has backed the market’s view that we’re close to the end of the hiking cycle in Europe,” said Chris Weston, head of research at broker Pepperstone in Melbourne.

The remarks also drove a rally in European bonds, gilts and Treasuries that extended into Asian sovereigns on Wednesday.

Benchmark 10-year U.S. Treasuries yields were 2 basis points lower at 3.7717%. EUR/GVD

The yen slipped to a one-week low of 139.43 per dollar and Japanese government bonds rallied following the Bank of Japan’s governor sticking to his script that policy shifts are still some time away.

Brent crude oil futures were steady at $79.42 a barrel after gaining on Tuesday. Gold held gains made as yields fell and bought $1,975 an ounce.

Editing by Lincoln Feast, Jamie Freed and Sam Holmes

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