European stocks fell on Wednesday as investors weighed surging inflation in the U.K. and positioned ahead of the release of the latest FOMC meeting minutes.
London's FTSE 100 edged into negative territory after data showed the U.K.'s annual rate of inflation moved into double digits in July and is set to rise even higher by the end of the year.
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Economists at JPMorgan see increasing signs that global inflation is set to ease, with prices of food and many commodities down from recent peaks. However, they expect that disinflation to be evident first in the U.S., with Europe set to lag behind despite some recent easing in the prices of goods leaving factory gates.
"Europe, however, faces ongoing pressure from surging natural gas prices that have more than doubled over the past three months," JPMorgan wrote in a note to clients.
"We expect the combined drag of a squeeze on purchasing power and depressed sentiment to tip the region into recession this year."
Inflation expectations are relatively firmly anchored in the eurozone, Helaba said.
The five-year/five-year forward--a measure of longer-term market-based inflation expectations--for the eurozone has been hovering just above 2% since the beginning of July.
"The topic of inflation seems to have receded somewhat into the background currently," Helaba said.
Stock futures fell in premarket trading and while more earnings reports from retailers such as Target and Lowe's are scheduled for Wednesday, the focus for investors will be on the Fed meeting minutes.
Recent signs of cooling inflation at both the consumer and wholesale levels have led investors to bet on a less aggressive Fed.
"Investors will be looking for any clues in the minutes report that suggest the Fed may slow its pace of rate hikes now that the inflation data are starting to decelerate," said AlphasFuture.
The dollar could rise if the Fed's latest meeting minutes push back against market expectations for the central bank to pivot towards interest-rate cuts next year, ING said.
Rhetoric from Fed officials since the July meeting suggest this is likely to be the case, particularly since the Fed funds future price the policy rate being cut from 3.6% to 3.2% in the second half of 2023, ING said.
"A further rejection of this market pricing should help the dollar" and could help the DXY Dollar Index rise to around 107.00, ING said.
Sterling and U.K. Inflation:
Sterling stayed higher on the day after data showed U.K. inflation accelerated by more than expected in July.
Inflation rose to a four-decade high of 10.1% in July from 9.4% in June, exceeding the 9.8% expected by analysts in a WSJ survey.
"Inflation printing above forecasts adds to the mounting pressure on the Bank of England to tighten monetary policy and continue to raise interest rates," Silicon Valley said.
"Expect sterling to remain volatile in response as markets grapple with a cost of living crisis, a fall in real wages, rampant price growth and a bleak outlook for economic activity."
Ebury said the inflation data has both positive and negative implications for sterling.
Higher inflation should trigger a more aggressive policy response from the BOE, which is a "bullish signal" for sterling, Ebury said.
"On the other hand, however, higher prices present a clear downside risk to economic activity, and raises the possibility of a potentially prolonged U.K. recession, which is clearly bearish for GBP."
Read: Pound Won't Necessarily Rise if BOE Steps Up Inflation Battle
Read: Surging UK Inflation Increases Recession Risk
The 1% mark for the 10-year German Bund yield is expected to remain a support level, Commerzbank said, as it sticks to its constructive outright stance.
Commerzbank said the market remains in summer trading mode, characterized by larger swings in shaky liquidity.
10-year gilt yields rose after the latest U.K. annual inflation print.
"Every upwards inflation surprise tightens the bind the BOE finds itself in, with mounting inflation pressure combined with growing recessionary headwinds," abrdn said.
It expects the BOE will deliver another 0.5% interest rate increase at its next meeting.
With monetary policy having to tighten even in the face of bad economic news, investors continue to have little in the way of a safety net from central banks, which is likely to keep markets volatile, abrdn said.
Mizuho said it was looking to fade rallies in gilts, with further increases in year-on-year inflation to come in the coming months.
"The U.K. faces eye-watering YoY inflation rates until at least Q1 2023," Mizuho said.
The uncertainty of forecasting of Ofgem [Office of Gas and Electricity Markets] energy price cap rises, and the feed-through into CPI, will maintain hawkish pressure on the BOE, it said.
Mizuho's year-end target for the 10-year gilt yield is 2.3%.
Oil prices ticked higher by midmorning in Europe, recovering after dropping to their lowest level in six months, as data showed that U.S. crude and gasoline inventories shrank.
However, Brent remained close to its lowest level since just before Russia's invasion of Ukraine.
Data from the API on Tuesday showed U.S. crude stocks fell by 400,000 barrels last week while gasoline stocks slumped by 4.5 million barrels. Demand for gasoline in the U.S. had been sluggish despite peak driving season. API's data could suggest delayed demand is kicking in. The Department of Energy's inventory stats are due later Wednesday.
Base metals were mixed, "chopping sideways with weak supply meeting weak demand," Marex said, referring to earlier trading in Asia.
Zinc was down 1% after shooting higher Tuesday following Nyrstar's announcement that it will be moving its Dutch zinc operations into "care and maintenance." Marex said zinc inventories were "close to record lows" at 75,000 ton.
It added that aggregate demand for base metals "has been dipping and coupled with poor PMI and global inflation as a gauge, it has been impacting sentiment for commodities and base metals consumption in general."
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U.K. Inflation Tops 10%, Underlining Gloomy Outlook for Europe
The U.K.'s annual rate of inflation moved into double digits in July and is set to rise even higher by the end of the year, heaping greater pressure on stretched household budgets and threatening a lengthy economic contraction.
That pickup in inflation has been replicated in other parts of Europe, even as consumer prices have started to slow in the U.S. That is because energy prices have continued to accelerate across Europe as Russia withholds supplies of natural gas, with the continent facing a possible crunch this winter.
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