Europe close: Stocks gain as falling inflation lifts rate-cut hopes

European stock markets rose to a two-and-a-half-month high on Thursday after big slowdown in inflation in both the US and eurozone raised hopes that central banks might move to cut interest rates sooner than predicted.

The pan-European Stoxx 600 index was up 0.5% by the end of play, hitting its highest close since 15 September (CHECK) – helped by gains across all major European indices.

The year-on-year change in eurozone consumer prices slowed to just 2.4% in November, down from 2.9% in October and well below the 2.7% expected by economists. This was the lowest rate of annual inflation since early 2021 and comes within touching distance of the European Central Bank’s 2% target.

“We expect the ECB will acknowledge more clearly it has reached the terminal rate when it releases its updated December forecasts, whilst maintaining a cautious rhetoric on the beginning of the easing cycle,” said economist Paolo Grignani from Oxford Economics.

Meanwhile, US inflation eased as expected in the month of October, which will provide some reassurance to the Federal Reserve that elevated interest rates are doing their job to cool economic growth and tame price pressures. The Fed’s preferred gauge of inflation, the core personal consumption expenditures index, slowed to 3.5% from 3.7%, in line with economists' forecasts, as personal spending growth eased to 0.2% over the month from 0.7% previously.

Ryan Brandham, head of global capital markets in North America at Validus Risk Management, said while core inflation levels are still too elevated for the Fed to declare victory, “it marks a new low for the series that will likely please the Fed and alleviate any pressure to implement further hikes”.

He said: “It remains to be seen if getting from 3% to 2% will be easy, or if inflation will remain sticky in 2024. Considering the market’s current disinflationary theme, today’s release is likely to be supportive of equities, bonds, and asset prices in general, and should set the tone for the remainder of the week.”

All eyes on OPEC+

OPEC+ members were holding their closely watched meeting on Thursday, a week later than originally scheduled due to some reported disagreements between member nations. Crude futures climbed after the organisation agreed to another output reduction of over one million barrels of oil per day.

Oil majors Shell, BP, Repsol and TotalEnergies were all putting in decent gains as the price of Brent rose over 1% to $83.80 a barrel.

UK-listed oil group Harbour Energy, meanwhile, was extending gains made the previous session after it held on to full-year production targets and expressed interest in "a number of material M&A opportunities".

Dutch insurer ASR Nederland surged after lifting its cost synergy target from last year’s €2.3bn acquisition of Aegon’s local pension, life and non-life insurance, banking, and mortgage origination activities.

London’s second-tier index, the FTSE 250, was bucking the trend by trading firmly lower on the back of some disappointing results and updates from Dr Martens, Auction Technology Group, Mitchells & Butlers and Me Group International. Dr Martens was the standout faller, dropping over 20% after warning on full-year profits.