EMEA Morning Briefing : Stocks Could Nudge Higher as Investors Parse U.S. Inflation Data

MARKET WRAPS

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EU foreign trade, industrial production; IEA oil market report; UK inflation figures, producer prices, house price index; trading updates from Naturgy, EDP Renovaveis, Carrefour, Lagardere, Kering, Sberbank, Glencore, Hargreaves Lansdown, Barclays, Heineken, Finnair

Opening Call:

Shares may edge up in Europe on Wednesday after conflicting signals from U.S. inflation data. In Asia, stock benchmarks fell; Treasury yields dropped; the dollar gained; while oil and gold declined.

Equities:

European stocks could inch higher on Wednesday after the U.S. January consumer-price index showed inflation slowed in January, but not as quickly as some economists had expected.

The data make it likely the Fed will not only raise interest rates in March, as was widely anticipated, but also point to the need for further rate increases in the following months.

"The strength of core inflation suggests that the Fed has a lot more work to do to bring inflation back to 2%," said Goldman Sachs Asset Management.

Brandywine Global said that after Tuesday's inflation data, investors are pricing out rate cuts, which is driving the yield on the 2-year Treasury higher because they had started to reflect rate cuts next year. "But based on the data to this point, it looks like the markets were premature pricing the rate cuts."

The next big data point will be January retail sales on Wednesday, offering clues about the strength of consumer spending and the economy in the face of higher interest rates.

"If retail sales also show strength tomorrow, the Fed may have to increase their funds rate target to 5.5% in order to tame inflation," said Goldman Sachs Asset Management said.

Forex:

The dollar gained strength amid risk-off sentiment sparked by U.S. CPI data released overnight.

The stronger-than-expected data have sent jitters to market participants, CMC Markets said, noting that January headline inflation was 6.4% on year, higher than an estimated 6.2%. The resurgent inflation is certainly not good news for global markets, it added.

"US inflation is still resolutely sticky, and it shows the Federal Reserve still has more to do," IG said.

"The direction of inflation is definitely lower but still higher than expectations so it's a bit mixed at the end of the day, and as a result the expectations for terminal rates have been creeping up," Silicon Valley Bank said.

Investors whose views are based on futures trade and Fed funds are still stubbornly sticking to the notion that we could be in a cutting zone by the end of the year even if rates go to 5.25%, it said.

Bonds:

Treasury yields fell following earlier gains after U.S. CPI data revealed signs of sticky inflation that is likely to keep the Federal Reserve hiking interest rates for longer than expected.

"January CPI data make clear that inflation is not dropping to 2% without a recession raising unemployment above 4.5% and this underscores my long-held view that the Fed erred by downshifting hikes," TS Lombard's Steven Blitz said.

Investors increasingly see the Fed raising rates in the next two meetings to a 5%-5.25% range and holding them there for the remainder of the year, according to the CME's FedWatch tool.

Energy:

Oil declined in Asia, weighed by a big increase in U.S. oil supplies.

The market has continued to trade weaker after bearish American Petroleum Institute data showed U.S. inventories increasing across the board last week, said ING.

The API said U.S. commercial inventories of crude oil rose last week by a very large 10.5 million barrels, a source citing the data said.

The U.S. government also said it would follow through with a plan to sell another 26 million barrels of crude from its Strategic Petroleum Reserve.

The U.S. Energy Department said the sale will "fulfill the congressional mandate set forth" as part of the Bipartisan Budget Act of 2015 and the Fixing America's Surface Transportation Act.

The release plans were part of a congressional-mandate related to annual budgets that has been in place for almost a decade, Sevens Report Research said.

But "when traders see an SPR release headline cross the wires, they think 'more supply on the market' and hit the sell button first and ask questions later."

Metals:

Gold slipped in Asia, but was supported by potential safe-haven demand amid ongoing tensions between U.S. and China over suspected spy balloons.

The precious metal appears to be performing better than most risky assets, which could possibly be due to some safe-haven flows, said Oanda.

"The pace of inflation continues to moderate but at a slower rate," GraniteShares said, in reaction to the U.S. CPI data. "Interestingly, core inflation increased less than all-in inflation," rising 0.4% month on month versus 0.5% month on month for all-in CPI, it said.

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Copper rose amid ongoing supply-shortage prospects.

The downside for the industrial metal's prices remains protected by mine supply issues, said ANZ Research.

On Sunday, Freeport-McMoRan said its PT Freeport Indonesia's Grasberg operations have been temporarily disrupted owing to substantial rainfall and landslides in the area of its milling operations in Papua, Indonesia. The operation's daily production is nearly 5 million pounds of copper.

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Chinese iron-ore futures were higher as demand in upstream sectors, including steel and other building materials, increased.

China's reopening and the full resumption of factory activity will likely lead steel mills to replenish their stocks of iron ore, Huatai Futures said.

As demand strengthens, the mismatch between supply and demand will become increasingly obvious, supporting prices, it said.

TODAY'S TOP HEADLINES

Fed Officials Stress Inflation Fight Isn't Over

The leaders of the New York and Philadelphia Federal Reserve Banks said they see inflation remaining above the central bank's 2% target this year, with the U.S. avoiding a recession despite interest-rate increases aimed at keeping price pressures in check.

"We need all the gears turning at the right pace to restore balance between demand and supply in the entire economy," New York Fed leader John Williams said Tuesday at a New York Bankers Association event. "We still have some way to go to achieve that goal."

Suspected Iranian Weapons Seized by U.S. Navy May Go to Ukraine

The U.S. military is considering sending Ukraine thousands of seized weapons and more than a million rounds of ammunition once bound for Iran-backed fighters in Yemen, an unprecedented step that would help Kyiv battle Russian forces, U.S. and European officials said.

U.S. officials said they are looking at sending Ukraine more than 5,000 assault rifles, 1.6 million rounds of small arms ammunition, a small number of antitank missiles, and more than 7,000 proximity fuses seized in recent months off the Yemen coast from smugglers suspected of working for Iran.

Boeing, Airbus Sell 470 Planes to Air India in Record Deal

Air India Ltd. ordered 470 jets from Boeing Co. and Airbus SE, marking the largest deal for commercial aircraft in aviation history and coming as airlines scramble for jets to meet surging demand for air travel.

The airline said it has agreed to purchase 250 Airbus jets and 220 Boeing planes, surpassing a deal for 460 planes by American Airlines in 2011. The deal is aimed at providing more planes to supply India, which is expected to be the fastest-growing major aviation market in the world.

Louis Vuitton Taps Pharrell Williams as Next Menswear Designer

Louis Vuitton has hired Pharrell Williams, the music producer and streetwear entrepreneur, to be its creative director of menswear, the company said.

Mr. Williams, 49, assumes the role previously held by Virgil Abloh, who died in November 2021. Mr. Abloh was the first Black American to be appointed as the head designer at a European luxury house. Mr. Williams, a native of Virginia Beach, Va., who rose to prominence in the late 1990s as a part of hip-hop production duo the Neptunes, is now the second.

EU Lawmakers Vote to Ban Sale of New Gasoline-Powered Cars From 2035

BRUSSELS-European Union lawmakers approved a law that will effectively ban the sale of new gasoline- and diesel-powered cars in the bloc from 2035, one of the most aggressive moves yet by a major economy to accelerate the transition to electric vehicles.

In setting a date to wind down sales of new passenger vehicles with internal combustion engines, the EU's move will likely further fuel a global shift that is already having an impact on investment and product development by car manufacturers and their suppliers.

Elon Musk Gave $1.9 Billion of Tesla Shares to Charity Last Year

Elon Musk donated roughly $1.9 billion of Tesla Inc. stock to charity last year, according to a regulatory filing made Tuesday.

Mr. Musk, Tesla's chief executive, reported having donated roughly 11.6 million shares last year, fewer than he donated in 2021, adjusted for the 3-for-1 split in the company's shares that took effect in 2022. The securities filing doesn't name any recipient for the donations.

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Expected Major Events for Wednesday

00:01/UK: Jan Scottish Retail Sales Monitor

07:00/NOR: Jan External trade in goods

07:00/NOR: Dec Monthly GDP

07:00/UK: Jan UK producer prices

07:00/UK: Jan UK monthly inflation figures

08:00/SVK: Jan Core & net inflation development

08:00/SVK: Jan CPI

08:00/SPN: Jan CPI

09:00/FRA: Feb IEA Oil Market Report

09:00/POL: Dec Merchandise trade

09:00/BUL: Jan CPI

09:00/POL: Jan CPI

09:30/UK: Dec UK House Price Index

10:00/GRE: Jan CPI

10:00/EU: Dec Foreign trade

10:00/EU: Dec Industrial Production

11:00/IRL: Dec Goods Exports and Imports

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02-15-23 0016ET