European Midday Briefing : Cautious Fed Weighs on Shares; BOE Awaited

MARKET WRAPS

Stocks:

European shares fell on Thursday after the Federal Reserve surprised markets by signaling interest rates won't fall as much as previously planned.

Pimco warned that the probability of a recession in the U.S. is now a coin toss. Historically, when rates have risen this high this fast to bring inflation back to the Fed's 2% target, the economy has tended to fall into recession, but a soft landing is certainly possible, Pimco added.

Ahead, the Bank of England is expected to raise interest rates by a quarter-point, as the central bank attempts to get a grip on inflation. But it's a close call.

"We're still tempted to say the BOE will hike rates [on Thursday], but the current tightening cycle is very close to its conclusion," ING said.

Read BOE to Raise Rates But More Could Be Needed, Says Wellington Management

Stocks to Watch

Renault shares aren't reflecting its recovery in core earnings, Citi said, adding the car maker's strong first-half results, and its 2023 recovery in sales, should move the needle more. Citi's target price on the stock is EUR48. Read more.

U.S. Markets:

The post-Fed hangover looks likely to endure on Wall Street. Stock futures edged down and Treasury yields rose again, pointing to market action triggered by the Fed stretching into a second day.

"In this environment with higher rates for longer, it's more difficult to achieve a soft landing. You would expect more declines in growth," BlackRock said.

The benchmark 10-year Treasury yield climbed after closing on Wednesday at 4.346%. Shorter-dated bond yields, those most sensitive to interest rate moves, also increased, with the 2-year yield extending its rise after closing at the highest level since July 2006.

Data watch: The weekly jobless claims release and existing home sales data scheduled for release later on Thursday.

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Forex:

The Fed's updated projections pointing to a "soft landing" and interest rates staying higher for longer support the dollar, Commerzbank Research said.

"The Fed...confirmed exactly the narrative that has been supporting the dollar rally since the end of July," it added.

The Swiss franc hit its weakest in two months against the euro after the SNB unexpectedly left interest rates at 1.75%, when markets had expected a hike to 2%.

The SNB said "significant tightening of monetary policy over recent quarters is countering remaining inflationary pressure," although further rate increases can't be ruled out to ensure medium-term price stability. Read more.

The Swedish krona rose after the Riksbank raised the policy rate by 25 basis points to 4.00%, as expected, and indicated that it could be raised further, saying that inflationary pressures in Sweden are "still too high." Read more.

Read Norwegian Krone Rises After Norges Bank Raises Rate, Signals One More Hike

Bonds:

Eurozone government bond yields rose with the 10-year German Bund yield hovering close to its year-to-date high, after the Fed's "high-for-long" message on rates prompted some selloff in Treasurys.

Having left interest rates unchanged at 5.25%-5.50%, as expected, the Fed retained a hawkish bias, UniCredit Research said.

Energy:

Oil prices traded more than 1% lower on the Fed message.

It marks a second day of losses following a steep run-up in recent weeks. Analysts have questioned whether the rally would continue or whether profit-taking would cap it.

"Crude oil traders' focus on consolidation has been strengthened by the higher-for-longer message signaled by the [Fed], but while it may raise some demand concerns for 2024, the short-term outlook points to continued tightness," Saxo said.

Metals:

Gold and base metals prices slipped, weighed by a stronger dollar, following the Fed.

DOW JONES NEWSPLUS

EMEA HEADLINES

Switzerland's Central Bank Unexpectedly Holds Rates

Switzerland's central bank on Thursday unexpectedly held its key interest rate steady at 1.75%, but signaled further tightening was still possible in its efforts to bring inflation to target.

Economists had expected a 25 basis-point hike, but the Swiss National Bank said tightening of monetary policy over recent quarters is countering inflationary pressure.

Sweden's Riksbank Lifts Policy Rate to 4.00% From 3.75%, Signals More Hikes Could Come

Sweden's central bank on Thursday lifted its key policy rate to 4.00% from 3.75%, as expected, and said rates could be raised further as it continues to fight stubbornly high inflation.

The Riksbank's new rate path now implies the rate will peak at around 4.10% in the third quarter of 2024, from 4.05% previously, and remain at that level until a first cut in 2025.

Casino Guichard-Perrachon Lowers 2024-28 France Sales, Earnings Views

Casino Guichard-Perrachon lowered its France sales and earnings projections for the 2024-28 period following a review of the estimated trajectory of its units and actions taken as part of the company's financial restructuring.

The French grocer said late Wednesday that its updated 2024-28 business plan now contemplates 2028 sales for its consolidated French operations of 17.30 billion euros ($18.44 billion), which compares with EUR18.805 billion forecast in June. The company expects 2024 sales at EUR14.80 billion and 2025 sales at EUR15.68 billion, in both cases lower than previously indicated.

Next Raises 2023 Views After Online Sales Boost Profit

Next PLC raised its full-year guidance after first-half pretax profit rose boosted by online sales, as strong consumer demand continues to defy a challenging economic backdrop.

The fashion retailer on Thursday posted a profit for the six months ended July 30 of 419.8 million pounds ($518.2 million), compared with a profit of GBP400.6 million a year prior. This exceeded an RBC Capital Markets forecast of GBP384 million.

Iran's Oil Exports Have Soared During Quiet Diplomacy With U.S.

WASHINGTON-The U.S. backed away from some actions meant to stop Iran's oil shipments as Washington and Tehran conducted negotiations that led to Monday's release of five Americans, part of a larger step back from sanctions enforcement that has seen Iran's energy exports grow, according to current and former U.S. officials.

The release of the five Americans came days after the Biden administration issued a waiver for international banks to transfer $6 billion in frozen Iranian money from South Korea to Qatar. The prisoners' return to the U.S. also follows months of rising Iranian oil shipments, including to China, Iran's biggest buyer, as Washington chose not to aggressively enforce the international sanctions regime, according to people familiar with the matter.

GLOBAL NEWS

Higher Interest Rates Not Just for Longer, but Maybe Forever

On Wednesday, Federal Reserve officials surprised markets by signaling interest rates won't fall as much as previously planned.

The tweak might be more important than it looks. In their projections and commentary, some officials hint that rates might be higher not just for longer, but forever. In more technical terms, the so-called neutral rate, which keeps inflation and unemployment stable over time, has risen.

Don't Buy the Fed's Rate Projections

Doth the Fed project too much?

Federal Reserve policy makers on Wednesday held to their target range on rates-no surprise there. If there was a surprise, it was how little they expect to cut rates next year.

Fed Holds Rates Steady but Pencils In One More Hike This Year

WASHINGTON-Federal Reserve officials voted to hold interest rates steady at a 22-year high and revealed a divide over whether they should raise them once more this year, with most leaning toward another increase.

Fed Chair Jerome Powell said that officials didn't need to decide yet whether to lift rates again after a historically rapid series of increases over the past 18 months and as they await evidence that a recent inflation slowdown can be sustained.

Saudi Uranium Enrichment Floated Under Possible Israel Deal

Israeli officials are quietly working with the Biden administration on a polarizing proposal to set up a U.S.-run uranium-enrichment operation in Saudi Arabia as part of a complex three-way deal to establish official diplomatic relations between the two Middle Eastern countries, according to U.S. and Israeli officials.

Israeli Prime Minister Benjamin Netanyahu directed top Israeli nuclear and security specialists to cooperate with U.S. negotiators as they try to reach a compromise that could allow Saudi Arabia to become the second country in the Middle East, after Iran, to openly enrich uranium, the officials said.

Kevin McCarthy Sees Progress in Winning Over GOP's 'Dysfunction Caucus'

The big problem facing House Speaker Kevin McCarthy (R., Calif.) as he tries to win over a dozen or so holdout Republicans: It might be impossible to make enough of them happy to head off a government shutdown in about 10 days.

But another day of talks yielded signs of progress late Wednesday, with McCarthy saying that the chamber would take a procedural vote Thursday to advance a defense-appropriations bill that a small band of conservatives had derailed earlier this week. He also floated a new short-term stopgap bill meant to buy time past the Sept. 30 deadline to craft full-year bills.

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This article is a text version of a Wall Street Journal newsletter published earlier today.

(END) Dow Jones Newswires

09-21-23 0530ET