European stocks pared early gains in morning trade on Thursday as investors turned cautious ahead of US economic data that may offer further guidance on the path for interest rates.

The region-wide Stoxx 600 was up 0.3 per cent, off its early highs, although Germany’s Dax index added 0.5 per cent and the FTSE 100 rose 0.2 per cent.

US futures turned lower, with contracts tracking the blue-chip S&P 500 down 0.2 per cent and the tech-heavy Nasdaq 100 off 0.3 per cent.

Investors were preparing for the release of US producer price inflation figures as they try to get a clearer picture of the health of the American economy and the outlook for interest rates.

Over the past few days signs of persistent inflation has rippled through markets, raising the level at which investors expect US rates to peak and lowering the number of rate cuts forecast for later this year.

The headline PPI number is expected to have risen 5.5 per cent in January, down from a 6.2 per cent year-on-year increase in December.

The monthly results dropped 0.5 per cent in December, the largest monthly decline since April 2020, fuelling speculation that inflation may be cooling off.

US stocks rose overnight and in morning trade in Europe as investors cheered stronger than expected US retail sales that are expected to boost corporate earnings, which raised the prospect that the US economy would avoid a recession in the first quarter.

“What we are seeing is markets pricing in better growth expectations,” said Emmanuel Cau, head of European equity strategy at Barclays. “Investors were on recession positions and those are being unwound.”

However some economists fear that data depicting economic growth will encourage the major central banks to press on with more interest rate increases to stamp out lingering inflation.

“For stocks uncertainty is worse than a bad outcome — what’s happening now is that bulls are leading the bears based on the belief that we might avoid major surprises in the coming months and inflation is receding,” said Mobeen Tahir, director of macroeconomic research and tactical solutions at WisdomTree Europe.

Yields on two-year US Treasury notes, which are more sensitive to interest rate changes, fell 0.02 percentage points to 4.6 per cent, while that on 10-year notes dropped 0.01 percentage points to 3.79 per cent. Yields rise when bond prices fall.

The dollar index, which measures the greenback against a basket of peer currencies, was down 0.2 per cent.

European Central Bank president Christine Lagarde addressed EU lawmakers on Wednesday and stressed the need for more interest rate rises. The euro gained 0.1 per cent against the dollar.

Brent crude, the international benchmark, was up 0.1 per cent at $85.51 a barrel and WTI, the US benchmark, gained 0.3 per cent to $78.82 a barrel.

Hong Kong’s Hang Seng index gained 0.8 per cent, while China’s CSI 300 lost 0.7 per cent.

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