European Shares Rally as U.S. Inflation Data Boost Rate Cut Hopes

European shares rose on Friday following softer U.S. inflation data, which spurred hope for Federal Reserve interest rate cuts. The pan-European STOXX 600 index increased by 0.3%, with utilities leading the gains. Despite recent eurozone inflation concerns, traders remain optimistic about upcoming rate cuts in both regions.

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

The pan-European STOXX 600 index was up 0.3%, led by advances in utilities that rose 0.7%. The benchmark index is on track for a second week of declines as yields in the eurozone spiked to mirror their U.S. counterparts on worries over interest rates staying elevated for longer. The index, however, is likely to log gains for the month.

A U.S. Commerce Department report showed inflation may have made a little progress toward the Fed's 2% goal last month, with the core personal consumption expenditures (PCE) price index rising 0.2% in April. Economists had expected the core PCE index to rise 0.3% in April. After the report, traders priced in about a 51% chance of a rate cut by September, versus about 49% before the report.

"This is a market-positive report. It appears that both the headline and core numbers came in very much in line with expectations," said Art Hogan, chief market strategist, B Riley Wealth. Meanwhile, euro zone inflation rose in May, a sign the European Central Bank still faces a slow and uncertain journey to rein in prices. A rate cut by the ECB in June is all but certain next week, a Reuters poll showed.

The yield on Germany's Bund, the eurozone benchmark, rose after the inflation data but hovered near six-month highs and was last at 2.661%. 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.

Swedish defence equipment maker Saab was the top gainer on the benchmark index, jumping 5.3% after it received an order worth 7.7 billion crowns ($727 million). In company news, JD Sports Fashion dropped 6.0% to the bottom of the STOXX 600 after the British sportswear retailer kept the profit guidance same for its 2024/25 year.

Telecom Italia was also at the bottom of the index, with shares falling as much as 2.7% after U.S. investment firm KKR secured an unconditional EU antitrust approval for the 22-billion-euro ($24 billion) acquisition of the telecom company's fixed-line network. IT services firm Capgemini fell 4.9% as JP Morgan cut its rating to neutral from overweight.

Energy firm Centrica jumped 3.8% after RBC raised its rating to 'outperform' from 'sector perform.'