European markets mostly fell Friday after mixed trading in Asia and ahead of an expected lower U.S. open.
Concerns about the cost of living and the looming prospects of a recession remained elevated as investors digested gloomy data.
Data released Friday showed German producer prices posted its biggest increase ever recorded, driven by higher energy prices, while U.K. consumer confidence hit a record low in August.
"With inflation set to surge further, we think the worst of the spending crunch still lies ahead," Capital Economics said.
The Stoxx Europe 600, the CAC 40 and DAX all retreated while the FTSE 100 was slightly up, pushed higher by drug, consumer and oil shares.
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Luxury-goods makers have scope to up prices in the second half, UBS said. Pricing power remains, the bank said, a key weapon in luxury's armory, allowing brands to offset the effects of inflation.
It is in Europe that prices are most likely to rise given current wide premiums in other markets, partly due to currency effects, UBS said, noting that this would support companies' top lines and margins in the second half of the year amid a potential normalization of volumes.
Eurozone inflation was confirmed to have risen to a record high of 8.9% year-on-year in July, but inflation hasn't peaked yet, HSBC said. Although petrol prices have softened, the surge in wholesale gas prices continues and he expects eurozone inflation will peak at 10.0% year-on-year in October.
Looking further ahead, HSBC sees eurozone inflation declining to 3.2% by the end of 2023. "For that to happen, wholesale gas prices will need to stop rising, goods price inflation needs to soften as a result of easing supply bottlenecks, and services inflation has to ease due to weaker demand," the bank said. HSBC said the outlook is highly uncertain.
U.S. stock futures were headed for a weaker session on Friday, with technology set to bear the brunt of losses major indexes as Treasury yields rose on the view Federal Reserve hikes are set to continue.
Friday will be devoid of major data, leaving investors to mull over the past week's economic updates and hawkish comments from at least one Fed official on Thursday.
Treasury yields were notably climbing on Friday as investors returned to the view that Fed hikes were not quite over.
St. Louis Fed President James Bullard told The Wall Street Journal that he would "lean toward" a 75 basis point hike at the central bank's next Sept. 20-21 policy meeting. On the same day, investors heard more cautious comments from Kansas City Fed President Esther George, who said how fast hikes will happen remains up for debate.
Richmond Fed President Tom Barkin will speak at 9 a.m. ET. Investors are also focused on next week's Jackson Hole Symposium, with Fed Chairman Jerome Powell and other central bank officials scheduled to speak.
"It is patently clear that the Fed has inflation reduction as its main aim, even though it acknowledges the knock-on risk of derailing the economy," said Richard Hunter, head of markets at Interactive Investor.
"The market is still pricing in a 0.5% interest rate rise in September, although there are increasing concerns that another 0.75% hike could be on the cards, with rates currently projected to peak at 3.5%. Separate comments from several Fed officials suggested that there remains some way to go before victory can be declared on taming inflation," said Hunter.
Data this week revealed flat retail sales and disappointing results from some major retailers, such as Target and Kohl's, but Thursday brought data showing weekly jobless claims falling 2,000 to 250,000, with no signs of mass layoffs.
Economic bellwether and tractor maker Deere & Co. will report ahead of the market open.
Sterling is undervalued by more than 10%, a level rarely observed over recent decades, Insight Investment said, adding that the currency appears to be historically cheap. The average five-year return following periods when valuations have reached these levels has been around 17%, it said.
The pound is expected to fall further due to a gloomy economic outlook, even as data showed U.K. retail sales unexpectedly rose by 0.3% in July, MUFG said.
Record temperatures in the U.K. in July were "very likely" behind the increased retail sales, which won't change the overall picture of weak consumer spending, with the GBP/USD looking likely to slide further in the coming weeks, the bank said.
MUFG points to the latest GfK consumer confidence index for the U.K., which hit minus 44 in August, a new low for data going back to 1974.
The dollar rose to a one-month high against a basket of currencies and the euro, though this may reflect difficulties facing European and Asian economies rather than U.S.-specific news, ING said.
"It is hard to pin down the exact reason for dollar strength... However, the move suits our generally positive stance on the dollar at a time when European and Asian growth prospects remain challenged," the Dutch bank said.
Barring "very poor" upcoming U.S. data, the dollar is likely to "consolidate near the recent highs."
The current strong gains for the dollar may start to fade as the Fed could slow the pace of policy tightening, Insight Investment said.
"With the U.S. economy having experienced a 'technical' recession in the first half of 2022 it is clear that monetary tightening is working," it said.
This makes it unlikely that the Fed will need to increase rates meaningfully beyond what markets are already pricing in, and the pace of interest-rate rises is likely to become less aggressive, Insight Investment said.
Eurozone sovereigns have completed around 70% of total gross bond supply expected for 2022, broadly in line with 2021, but some peripheral states lag behind, Societe Generale said, nonetheless, not worrying too much about this lagging.
"While some peripheral countries are behind last year's progress, we are not overly concerned by supply-led pressures, given relatively healthy cash balances and supportive European Central Bank," the French bank said.
After the seasonal slowdown in government bond issuance in August, supply is expected to pick up in September, Societe Generale said. The bank expect issuance via syndications alone--auctions not included--to amount to EUR30 billion-EUR40 billion next month.
Eurozone peripheral government bond yield spreads have been under some widening pressure this week, with a shift higher in bond yields, low August liquidity and nervousness about next month's Italian elections playing a role, Barclays said.
"We think peripheral spread widening has likely in part reflected the broad moves higher in EUR yields, with poor August liquidity likely also contributing," the bank said.
Beyond this, "nervousness ahead of Italy's 25 September elections has likely encouraged the relative underperformance of Italian spreads on the week, in our view."
Also read: Spreads Expected to Remain on Widening Path in Almost All Bond Segments
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Oil prices were down after finishing higher overnight on data which showed a sharp drop in U.S. inventories.
"Recession fears remain elevated for key markets, including the U.S. and EU, raising concerns over the strength of future oil demand," Fitch Solutions said.
Meanwhile, developments relating to a potential renewed nuclear deal with Iran will also likely be closely watched.
Oil prices should recover despite recent losses as OPEC+ supply constraints are likely to continue while Chinese demand should recover, UBS said.
"We continue to believe that the recent decline in oil prices doesn't fully account for constraints on global supply," the bank said, adding that prices are expected to rebound to $125 a barrel by the end of the year.
Any OPEC+ supply increase are likely to be undermined by declining Russian output, while economic stimulus in China is likely to support the nation's rebound and boost its demand for oil, UBS said.
Gold prices lost further ground after suffering a fourth straight session loss overnight due to a stronger USD. "The U.S. dollar might continue to strengthen if U.S .economic data continues to surpass expectations," Oanda said. "After breaking below $1,800, gold has been struggling to regain its footing," the broker said.
Metals prices were down as a stronger dollar continues to weigh on commodity prices. Marex said the rising dollar "is a drag on commodities, " with sentiment still "risk-off."
Data showed U.K. consumer confidence fell to a record low this month, pushed by recession and inflation worries. That said, zinc is moving higher. Marex noted that zinc is a "standout," being the only metal down in terms of Chinese production, while other base metals rise.
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