Stock markets retreat as US inflation clouds rates outlook

Stock markets fell on Friday, with US indexes retreating from record highs as a key US inflation reading accelerated, lowering the possibility of sustained interest rate cuts in the coming months.

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Investors widely expect a cut next month to bolster the world's largest economy after Fed chief Jerome Powell signalled last week the risks of labour market weakness in the world’s top economy.

But the personal consumption expenditures (PCE) price index held steady at 2.6 per cent in July, above the Fed's two-percent target, with the core reading that strips out food and energy accelerating slightly to 2.9 per cent.

“The bad news is, inflation is continuing to inch higher, which isn’t really the environment the Fed likely wants to cut in,” said Bret Kenwell, an analyst at eToro.

Although a September cut of 25 basis points is probably still on the cards, “it may be hard for them to move as quickly or aggressively as they'd like with inflation moving higher”, he said.

Wall Street's main indexes fell at the open on Friday, after the Dow and S&P 500 closed at all-time highs on Thursday.

Wall Street will be closed Monday for the labor Day holiday.

In Europe, German data showed that unemployment in Europe's biggest economy topped three million in August for the first time in more than a decade.

Battered by high energy costs and fierce Chinese competition, German manufacturers were struggling even before US President Donald Trump erected new tariff walls.

Separate figures showed that German inflation rose in August for the first time this year at 2.2 per cent, which could lessen the chances for further European Central Bank rate cuts.