European shares rise after US inflation data keeps Fed rate cut hopes alive

By Shubham Batra and Shashwat Chauhan

(Reuters) -European shares rose on Friday after softer U.S. inflation data spurred hopes of interest rates cuts by the Federal Reserve, while June rate cut bets for the euro zone remained intact despite hotter than expected inflation figures from the region.

The pan-European STOXX 600 index closed 0.3% higher, but still recorded a second week of declines as euro zone bond yields spiked to mirror their U.S. counterparts on worries over interest rates remaining elevated.

The index was up for the month, however.

Data in the United States showed inflation tracked sideways in April, with the personal consumption expenditures (PCE) price index increasing 0.3% last month, and up 2.7% in the 12 months through April.

"The PCE data confirms price increases aren't as sticky as feared, keeping hopes of at least one (Fed) rate cut on the table," said David Russell, global head of market strategy at TradeStation.

Meanwhile, euro zone inflation picked up in May, a sign the European Central Bank still faces a slow and uncertain journey to rein in prices.

"The upside surprise was primarily driven by services inflation, ... that will be a cause for discussion at next week's ECB meeting, but we don't think it is a sufficient surprise to deter them from pressing ahead with a well-telegraphed 25 bps (basis points) cut," said Samuel Zief, head of global FX strategy at J.P. Morgan Private Bank.

An acceleration in inflation in the euro zone in May exceeded forecasts by 0.1 percentage points, which is not a significant deviation that should still allow the bank to start cutting rates, ECB policymaker Mario Centeno said.

A rate cut by the ECB in June is all but certain next week, a Reuters poll showed.

Separate readings showed German retail sales fell more than expected in April, while French consumer prices rose 2.7% year-on-year in May, above expectations due to higher energy prices.

Most of the major STOXX 600 sectors ended higher, with healthcare leading the way with an 1.1% advance, though a 1.5% tumble in technology stocks limited gains.

The yield on Germany's 10-year bund, the euro zone benchmark, hovered near six-month highs and was last at 2.66%.

Among headlining stocks, Airbus fell 2% after industry sources said the planemaker is facing new pressure on its planned production ramp-up for passenger jets.

IT services firm Capgemini fell 4.5% after at least two brokerages downgraded their rating on the stock.

Saab jumped 5.6% after the Swedish defence equipment maker said it had received an order worth 7.7 billion crowns ($727 million) from an unidentified Western country.

(Reporting by Shubham Batra, Purvi Agarwal and Shashwat Chauhan in Bengaluru; Editing by Tasim Zahid and Mark Potter)