European stock markets advanced on Friday in what was the best month since November 2020 for equity markets.
It came amid a flurry of economic data from the EU which showed that eurozone inflation reached a new record of 8.9% this month as energy prices continue to dampen the economy.
According to Eurostat, this was up from 8.6% in June, as the cost of living squeeze intensifies.
Energy is expected to have the highest annual rate in July — 39.7%, compared with 42.0% in June — following the jump in gas prices following the Ukraine war.
But food, alcohol and tobacco prices have soared by 9.8% in the year to July, up from 8.9% in June. Non-energy industrial goods cost 4.5% more, rising from 4.3%, while services inflation jumped to 3.7%, from 3.4% in June.
France managed to swerve a recession after it returned to growth in the second quarter, with gross domestic product (GDP) rising 0.5pc in the period after a 0.2% contraction at the start of the year.
Meanwhile, Spanish GDP jumped 1.1% — almost three times the forecast level. German GDP was unchanged in Q2 compared to Q1, a little worse than expected, and just 1.5% higher than a year ago.
Austria’s economy also continued to grow in the last quarter, with GDP increasing 0.5% in April to June.
Elsewhere, Portuguese GDP fell by 0.2% in the second quarter of the year, the National Statistics Institute (INE) said, due to weaker domestic demand.
Hussain Mehdi, macro and investment strategist at HSBC Asset Management, said: “Another upside inflation surprise will make uncomfortable reading in Frankfurt and exacerbates the household income squeeze. Underlying price pressures are emanating from a strong labour market, while further gas supply disruptions pose significant upside risks going forward.
"Recent declines in the euro exchange rate mean imported inflation is also a problem. This will keep the ECB on a hawkish trajectory this year even in the face of likely recession. We see good reason to remain cautious on eurozone equities, despite relatively attractive valuations.”
Across the pond, the S&P 500 (^GSPC) rose 0.5% and the tech-heavy Nasdaq (^IXIC) jumped 0.6% by the time of the European close. The Dow Jones (^DJI) rose 0.2% higher on opening as hopes of less aggressive interest rate rises boosts sentiment.
On Thursday, data showed that the American economy contracted for a second straight quarter, falling into a technical recession.
US GDP shrank by just over 0.2% in the quarter to June, or by 0.9% on an "annualised" basis, stoking fears that the global economy is heading into recession amid soaring energy and inflation.
Business inventories fell, and firms also cut back on investment during the period. Spending on real estate also declined, along with federal government spending, state and local government spending. However, exports of both goods and services increased, as did personal consumption.
Watch: US economy shrinks for second consecutive quarter
“In the afternoon, and in the wake of this week’s decision by the Federal Reserve to hike by another 75bps, and confirmation of the US economy slipping into recession yesterday we’ll be getting the latest personal spending data for June, along with the most recent core PCE inflation data, given that it is the Fed’s preferred measure of inflation targeting,” Michael Hewson of CMC Markets said.
“While headline CPI and PPI for June both saw unexpected increases in the headline numbers, it was notable that on the core numbers, both fell back.
“That’s been the overall trend for core prices since February and March, however the rise in food and energy prices is starting to create ripple out effects that could call a halt to the recent declines from the current peaks we saw in March.”
Stocks in Asia ignored a late rally on Wall Street overnight, as traders placed their focus on a US recession rather than a possible slowdown in the pace of rate hikes.
It came as China did not mention its full-year GDP growth target after a high-level Communist party meeting. It said instead it will try hard to achieve the best possible results for the economy this year.