European shares set for weekly gain on US inflation outlook

Investors were betting that the Fed would only raise rates one more time in its rate-hiking campaign

LONDON (Reuters) - European shares rose in early trading on Friday, with the STOXX 600 up for a fifth session in a row, as expectations rose that the U.S. Federal Reserve may soon finish raising interest rates.

Asian shares gained after the Monetary Authority of Singapore (MAS) surprised many by leaving policy unchanged, saying the tightening already underway would ensure inflation slowed sharply later this year.

Investors were betting that the Fed would only raise rates one more time in its rate-hiking campaign, after U.S. producer price data and labour market data on Thursday pointed to inflation cooling. This came after CPI data on Wednesday showed a small rise in U.S. consumer prices in March.

"The risk that the Fed will have to overdo it and cause a hard landing in its fight against inflation has receded," said Holger Schmieding, chief economist at Berenberg. "This underpins ... the general "risk on" mood in markets."

"Markets are expecting that the rate gap between the Fed and the ECB will narrow further over this summer," he added, citing expectations of further European Central Bank rate hikes.

At 0829 GMT, the MSCI World Equity Index was up 0.2 per cent on the day, near its highest since mid-February.

The STOXX 600 was up 0.4 per cent, in its fifth consecutive day of gains, and on track for a 1.5 per cent gain on the week.

London's FTSE 100 was up 0.3 per cent.

The euro benefited from expectations that the ECB will continue to raise rates, after data on Thursday showed euro zone industrial output was stronger than expected in February.

The euro was up 0.1 per cent on the day at $1.10565, having earlier hit its highest in around a year, while European government bond yields were set for a weekly rise.

The benchmark 10-year German yield was at 2.379 per cent, on track for a roughly 20 basis point rise on the week overall - its biggest weekly rise so far in 2023.

The U.S. dollar index was a touch lower, at 100.91, on track for its fifth consecutive week of declines.

Oil prices slipped after the West's energy watchdog warned that output cuts could exacerbate an oil supply deficit and hurt consumers, but Brent crude futures and West Texas Intermediate crude futures were still set for a fourth week of overall gains.

Investors are now bracing for earnings from Citigroup Inc, Wells Fargo and JPMorgan Chase & Co which could test the bullish mood given recent stress in the sector.

"We will be looking at bank earnings calls to follow discussions around deposits, lending standards, and any adjustments to bank funding that might be planned, including more debt sales," analysts at NatWest Markets said.

Investors are also waiting for U.S. retail sales data, due later on Friday.