MARKET WRAPS
Stocks:
European stocks wavered as investors digested inflation data and its possible impact on monetary policy
The pan-continental Stoxx Europe 600 was flat. British supermarket chain Tesco declined 5.3% after it said it expects lower profit as rising prices change shoppers' habits.
Stocks have come under pressure in recent days as concerns about inflation drove uncertainty about how aggressively the Federal Reserve could act to temper it. A data release on Tuesday showed that consumer prices accelerated further in March, rising 8.5% from a year earlier. The monthly increase was in line with economists' expectations and core inflation which excludes food and energy was slightly lower than predicted, according to Deutsche Bank.
"The market is swinging quickly to try and price 'peak inflation.' The assumption is that the yield curves in places such as the [U.S.] ... has already moved higher to such an extent, that their respective central banks are now just 'filling in the gaps.' Markets, after all, are forward-looking," said Jeffrey Halley, an analyst at broker Oanda.
"However, it just isn't that simple," Halley added. "The environment for equities remains challenging." The analyst cited the Russia-Ukraine war and ongoing Covid-19 lockdowns in China as headwinds, with uncertainty lying ahead for the coming U.S. earnings season.
Stocks to watch:
French luxury-goods group LVMH Moet Hennessy Louis Vuitton SE beat expectations with its first-quarter revenue update. Strong organic growth was driven by the core fashion business, though other divisions including watches and jewelry also performed above consensus forecasts. Read the analysts' comments here .
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Darktrace's third-quarter update brings annual recurring revenue growth of 46% and revenue growth of 50%, with guidance raised once again, Jefferies said.
The U.K. cybersecurity company's metrics were supported by growth of 37% in customer numbers, implying a continued improvement in annual recurring revenue per customer, the U.S. bank said.
Given Darktrace's strong momentum, the company increased its fiscal 2022 guidance for annual recurring revenue, revenue and adjusted Ebitda, Jefferies said.
Jefferies withdraws its rating and price target on Darktrace's shares, noting that up to 20 million shares are likely to be placed soon given the post-IPO lock-up expires in May. Shares were up 3.6%.
Data in focus:
Consumer prices in the U.K. rose more than expected in March, squeezing consumers' real incomes further and warranting another rate rise by the Bank of England in May, said Rupert Thompson, investment strategist at Kingswood.
The inflation rate rose to 7% in the 12 months to March, the highest rate since 1992 and up from 6.2% in February, official data showed. Thompson stresses that price gains were widespread, with core inflation, which excludes volatile food and energy prices, rising to 5.7% from 5.2% in the same timeframe.
"The data make another 0.25% rate hike on 5 May all the more certain and will exacerbate the cost of living squeeze," he said in a note.
Market Insight:
The market's pricing of two full 25 basis point interest rate rises by the ECB by year-end "seems like a reasonable scenario to us," Konstantin Veit, portfolio manager at Pimco, said in a note ahead of the ECB's monetary policy meeting on Thursday.
The asset manager doesn't expect the ECB to take any significant monetary policy decisions at this week's meeting, but the next set of macroeconomic staff forecasts in June "will likely provide the ECB cover to end net asset purchases in July," Veit said. He sees a first interest rate rise by the central bank in September as a plausible scenario.
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Data showing the annual U.K. inflation rate rose to 7% in March supports another interest rate rise by the Bank of England at the central bank's next meeting on May 5, said Jeremy Batstone-Carr, part of Raymond James European strategy team.
The uptick in consumer prices was largely driven by transport costs, with average petrol prices rising by 12.6 pence per litre between February and March, the biggest single monthly increase since records began in 1990, he said.
Inflation could hit 8% in April, reflecting the higher energy price cap raising gas and electricity prices. However, "there is some hope in that official forecasts suggest April's consumer price index data may represent the peak," he said.
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UniCredit's global leading indicator declined in March to levels consistent with global trade almost stagnating in 2Q. It was the first decrease after four monthly rises in a row, leaving the indicator at its lowest level since October.
This drop reflects the negative impact from the Russia-Ukraine crisis, according to UniCredit. A further deterioration is likely, the Italian bank said.
"Furthermore, given the rather lackluster development in the last few months, global trade might already come in stagnation territory in 2Q," UniCredit said.
The March reading is consistent with global trade rising a mediocre 0.7% on an annualized 3-months-on-3-months basis compared to its long-term average growth of between 4% and 5%, the bank said.
U.S. Markets:
Stock futures rose ahead of earnings reports from major companies and as investors considered the highest inflation in four decades.
"The inflation data was obviously not great, but maybe we're around the peak and we'll start to see something of a disinflationary trend over the coming months," said Esty Dwek, chief investment officer at FlowBank. "With bank earnings kicking off, we can get some direction. It's really going to be about the guidance that we get for the rest of the year."
JPMorgan, BlackRock, Delta Air Lines and Bed Bath & Beyond are slated to report Wednesday ahead of the opening bell. Goldman Sachs, Citigroup, Morgan Stanley and Wells Fargo are set to follow on Thursday.
The U.S. producer-price index for March, another gauge of inflation, is set to be released at 8:30 a.m. ET.
Forex:
The dollar rose as traders continue to bet on the Fed raising interest rates more aggressively even after data on Tuesday showed underlying inflation eased slightly in March.
The dollar briefly fell after the U.S. Labor Department said core consumer prices, which exclude volatile food and energy prices, rose 0.3% month-on-month in March after a 0.5% rise in February.
"We do not expect the March CPI on its own to alter the Fed's current plans for faster policy tightening in the near-term," MUFG Bank currency analyst Lee Hardman said in a note.
The dollar's decline on Tuesday was a correction rather than trend reversal, he said.
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The euro could rise considerably if ECB President Christine Lagarde's remarks at Thursday's meeting prompt the market to bet on an interest-rate rise as early as June, Ebury said.
Lagarde is likely to reiterate that the ECB will raise rates "some time" after asset purchases end but she could flag increased concerns over the persistence of high inflation, Ebury analysts said.
"Should the market perceive Lagarde's comments as leaving the door open to a hike at either of the June or July meetings, then the euro would likely rally rather sharply, particularly given the current suppressed value of the euro."
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Sterling fell against the dollar after data showed U.K. inflation accelerated in March, adding pressure on already squeezed household incomes. U.K. inflation rose to an annual rate of 7.0% in March from 6.2% in February, above the 6.7% expected by economists in a WSJ survey.
"The figures will add further pressure to the Bank of England to accelerate the pace of interest rate increases, even though the growth outlook has deteriorated," BRI Wealth Management's Dan Boardman-Weston said in a note.
The sharp rise in the cost of living, higher taxes and rate increases are hitting consumer demand, he said.
Bonds:
The yield on the benchmark 10-year Treasury note edged up to 2.784% from 2.724% on Tuesday, resuming its march upward after declining the day before.
European government bonds sold off with the benchmark German 10-year bond yield rising to 0.857%. The European Central Bank is meeting on Thursday and investors are awaiting more clarity on plans to curb stimulus measures.
"ECB speakers have turned a little bit more hawkish lately," said Jeremy Gatto, a multiasset investment manager at Unigestion. "They seem now to be agreeing that inflation might be a concern. It's difficult to get excited about Europe."
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Euro corporate bond markets are likely to trade steady ahead of Thursday's ECB meeting, said UniCredit's research team. "European corporate credit investors are likely to be in wait-and-see mode during today's session," analysts at the Italian bank said in a research note.
Even if they don't expect any policy changes at this Thursday's Governing Council meeting, they expect euro credit markets to remain largely unchanged in the run-up to the event.
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U.K. 10-year borrowing costs rise after official data Wednesday showed inflation hit a new three-decade high of 7% in March.
The 10-year gilt yield rose to 1.809% after the announcement, from the prior day's close of 1.802%, albeit failing to surpass Tuesday's intraday high of 1.906%, according to Tradeweb.
Rising fuel prices drove the annual consumer price index up to 7% in March, up from 6.2% in February and beating economists' expectations in a WSJ survey of 6.7%.
Commodities:
Oil edged higher after Russia casts doubt on the success of Ukraine peace negotiations, while weak data from China capped gains. Vladimir Putin said peace talks were at a "dead end," dashing hopes that a diplomatic solution could end the conflict and ease the oil market's supply crunch.
Data showed China's imports fell by 0.1% on year in March, sharply missing expectations for an 8% rise, as a lockdown in Shanghai took a toll on the nation's economy.
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04-13-22 0630ET
