Global stocks are treading water as traders look forward to the Fed’s pause in expectations

LONDON (Reuters) – European stocks started a mixed Tuesday, as weak US economic data reinforced expectations that the Federal Reserve may skip an interest rate hike when it meets next week.

The pan-European Stoxx 600 index (.STOXX) rose 0.1 percent to 460.40 at 0830 GMT. In the previous session, the index fell as data pointing to tepid US business activity sparked profit-taking after gains in the previous week. Germany’s DAX (.GDAXI) was flat, while London’s FTSE was down 0.3% (.FTSE).

British retail sales growth slowed to a seven-month low in May, the British Retail Consortium said on Tuesday, as rising food prices prompted shoppers to rein in spending on non-essential goods.

MSCI’s broadest index of world stocks (.MIWD00000PUS) was largely flat, while Tokyo’s Nikkei (.N225) rose 0.90% and China’s blue-chip index (.CSI300) fell nearly 1%.

The Reserve Bank of Australia (RBA) raised interest rates and warned that further increases may be required to ensure inflation returns to target. The RBA’s move sets the stage for a series of monetary policy decisions from major central banks around the world, with the Federal Reserve, European Central Bank and Bank of Japan set to hold policy meetings next week.

Three months ago, the question was how fast price hikes could come. Now, a pause and then more hikes in US interest rates may follow as a result of flat inflation, said Mike Kelly, head of multi-asset at Pine Bridge Investments.

“We’re still really stuck with the idea that you can have a mild recession in the United States without sending the world into a recession,” he said.

A slew of economic data combined with dovish comments from Fed officials last week has encouraged bets that the Fed will likely refrain from raising interest rates at its scheduled June 13-14 meeting.

Markets are placing an 82% chance of the Fed remaining flat, a sharp jump from the 36% chance the week before, according to the CME FedWatch tool.

Overnight data showed the U.S. services sector barely grew in May as new orders slowed, pushing a measure of the prices businesses pay for inputs to a three-year low, which could help the Fed’s fight against inflation.

The service industry accounts for more than two-thirds of the US economy.

“The index sends another signal that demand is slowing and cumulative tightening is working through the economy, giving room for the Fed to pause in June to assess conditions further,” Saxo Markets strategists said in a note to clients.

Data on Friday showed US non-farm payrolls rose by 339,000 in May, but a rise in the unemployment rate to a seven-month high of 3.7% indicated an easing of labor market conditions.

“The very near-term tactical risk for equity investors is that the Fed actually skips a meeting and raises interest rates in July, not June,” said Gary Duggan, CIO at Delma Capital.

In oil markets, prices gave up most of their gains from the previous session after Saudi Arabia, the world’s largest exporter, said it would cut production further. Brent and US crude oil fell about 2% to $75.17 and $70.58, respectively.

In currency markets, the dollar index, which measures the greenback against six major peers, settled at 104.01, while the euro rose 0.12% to $1.0725.

The yen fell 0.10% to 139.44 per dollar, while the pound sterling reached $1.2410, down 0.2% on the day.

In cryptocurrencies, bitcoin was last at $25,721, after falling more than 5% overnight after US securities regulator sued cryptocurrency exchange Binance, in another blow to the industry.

(Reporting by Neil Mackenzie). Editing by Dara Ranasinghe and Mark Potter

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