European Midday Briefing : Stocks Move Higher as U.K. Inflation Data Calms Nerves

MARKET WRAPS

Stocks:

European stocks were higher on Wednesday after U.K. inflation data held steady, defying expectations of a rise.

In a week when U.K. labor-market data and the U.S. CPI report had already come in ahead of expectations, inflation data for the U.K. should provide some much needed reprieve for markets and central bankers alike, J.P. Morgan Private Bank said.

Despite still reaccelerating slightly, the Bank of England will take particular comfort from the downside surprise in services inflation, suggesting tighter policy could still be feeding its way through the economy, it said.

"We don't expect to see that first cut come until around the middle of the year, but these sorts of prints give us and the markets more conviction about the direction of travel."

Shares on the Move

Heineken reported a 4.7% drop in 2023 consolidated beer volumes, as higher pricing to combat cost inflation weighed, and warned that economic and geopolitical volatility could hurt its performance this year. Shares were falling 5%.

ProSiebenSat.1 reported preliminary fourth-quarter earnings that topped its guidance, spurring a 10% rise in its shares.

Thyssenkrupp shares were 10% lower after it cut full-year sales and profit targets on faltering demand and impairment losses in the first quarter.

Stocks to Watch

When the London-listed mining majors report financial results next week, costs are likely to be key focus for investors following signs of operational stabilization in their production reports, Citi said.

Rio Tinto, Anglo American and Antofagasta are the bank's key sector picks, while Fresnillo "remains an attractive precious-metal play."

U.S. Markets:

Stock futures were higher and Treasury yields held below 4.3%, but fears persist that the Fed may take longer to start cutting interest rates.

There are no major economic data in focus but plenty of earnings. Companies due to report include Cisco, Occidental Petroleum and Kraft Heinz.

Stocks to Watch

Airbnb was down 4.7% after it topped fourth-quarter revenue expectations and said it expects first-quarter revenue of between $2.03 billion and $2.07 billion compared with expectations of $2.02 billion.

Shares of Lyft were rising 17% in premarket trading after the company reported adjusted earnings in the fourth quarter of 18 cents a share, topping forecasts of 9 cents.

Forex:

Sterling fell after the U.K. inflation data.

Some analysts said the data could mean the BOE could cut rates by the summer, potentially in June. Still, others warned inflation remained well above the central bank's 2.0% target and wages remained sticky and these factors limited the pound's losses.

ING said January's stronger-than-expected U.S. inflation data "is not a good look for a central bank preparing to cut rates" and should pave the way for the dollar to remain strong.

Given that seasonal patterns tend to favor the dollar in February and with PCE data--the next key data for the Fed--not due until February 29, "it looks like the dollar will be able to hold recent gains for another couple of weeks."

Danske Bank Research retained a long position in the dollar against the euro , sterling and Norwegian krone in its trading portfolio. "We remain constructive on the dollar in the near term and prefer selling EUR/USD rallies."

With G10 FX increasingly explained by local policy, rather than by only one major overarching theme, the coming months will be crucial, SEB Research said.

"Central banks are waiting for more data to solidify the confidence in shifting policies--with the Fed paying extra attention to service inflation, [the] ECB on wage growth and Bank of Japan on the outcome of wage negotiations with labor unions."

Bonds:

Inflation shocks beyond the first half of the year might be the most underpriced risks in markets, Oxford Economics said, adding that central banks are expected to proceed with interest-rate cuts more slowly than expected by markets.

"Central banks will [largely] not follow through with market pricing and we move to an underweight in DM [developed market] duration."

Oxford Economics, however, retained its overweight bias in emerging market bonds.

Energy:

Oil prices nudged higher on growing tensions in the Middle East as talks on a Gaza truce end inconclusively, but gains were capped by the hot inflation reading and fading hopes for early Fed rate cuts this year.

Investors' focus is now on official data from the Energy Information Administration and the IEA's monthly report on Thursday.

ING said the crude oil market is showing some signs of improving demand as the price structure of Brent indicates that backwardation--typically a sign of tight supply that occurs when spot prices are higher than future prices--has increased since the start of February.

Metals:

Base metals and gold were weaker as the fallout from the CPI print continued to hit sentiment.

"The outlook for gold will be largely dependent on Fed policy and if the pace of easing for this year is dialed back, it leaves our end-of-year forecast of $2,150 an ounce at risk," ING said.

EMEA HEADLINES

Eurozone Industrial Production Unexpectedly Expands Amid Signs Recovery for Sector

Eurozone manufacturing is showing signs of life again after industrial production jumped unexpectedly in December, further signaling that the recent slump in manufacturing in the bloc may be coming to a close.

Total production rose on 2.6% on month in December, according to figures published Wednesday by European Union statistics agency Eurostat, the second-straight rise, after a revised 0.4% increase recorded in November.

Ahold Delhaize Misses Forecasts on Higher Costs

Ahold Delhaize reported a 44% fall in fourth-quarter net profit after it booked higher costs, missing market forecasts.

The Dutch grocer said Wednesday that net profit for the quarter fell to 451 million euros ($483 million) compared with EUR809 million for the comparable period a year earlier and expectations of EUR550 million, according to a consensus forecast provided by the company and based on the estimates of 16 analysts.

ABN AMRO Launches EUR500 Mln Share Buyback After 4Q Beat Views

ABN AMRO Bank has set out its mid-term return on equity target and launched a 500 million euro ($535.4 million) share buyback after its fourth-quarter profit beat market forecasts.

The Dutch lender-which is partly owned by the Dutch state-guided for a return on tangible equity of 9%-10% for 2026, compared with its previous 10% target by 2024 and 12.2% in 2023. It has also targeted a fully-loaded Basel IV common equity Tier 1 ratio of 13.5% by year-end 2026.

Capgemini Hikes Dividend After Boost in Profit

Capgemini is raising its dividend after posting higher profit and revenue for 2023, a year marked by what Chief Executive Aiman Ezzat said was a slowdown in the industry.

The French consulting and technology group said Wednesday that annual net profit had increased 7% on year to 1.66 billion euros ($1.78 billion). Operating profit-the company's preferred measure of profitability-rose to EUR2.99 billion from EUR2.87 billion in 2022, generating a 13.3% margin.

GLOBAL NEWS

Rate Cuts Might Be Delayed. That's No Reason to Panic.

How much does it matter if the Federal Reserve starts cutting rates in June instead of May?

Not much to the broader economy, or even to investors. But that sure isn't how they reacted to Tuesday's consumer-price-index report. The Dow was down as much as 750 points by midafternoon and it closed 525 points, or 1.4%, lower. The more rate-sensitive Russell 2000 index of small-capitalization stocks plunged 4%, and the yield on 10-year U.S. Treasury notes rose to its highest since November.

Hotter-Than-Expected Inflation Clouds Rate-Cut Outlook

Inflation eased again in January but came in above Wall Street's expectations, clouding the Federal Reserve's path to rate cuts and potentially giving the central bank breathing space to wait until the middle of the year.

The Labor Department reported Tuesday that consumer prices rose 3.1% in January from a year earlier, versus a December gain of 3.4%. That marked the lowest reading since June.

Corporate Bond Funds Are Surging. What to Watch Out For.

Investors are snapping up corporate bonds, enticed by higher yields and the hope that a soft economic landing means the Federal Reserve will cut interest rates.

Those hopes may well be dashed.

Senate Passes $95.3 Billion Ukraine, Israel Aid Package

WASHINGTON-The Senate passed a $95.3 billion package backed by President Biden that contains a fresh round of aid for Ukraine and funds for Israel and Taiwan, overcoming Republican objections but facing an uncertain future in the GOP-run House.

The Senate's 70-29 vote marked a victory for proponents of a muscular role for the U.S. in foreign affairs, for the moment elbowing aside isolationist forces in Congress. The bill's passage puts the spotlight on House Speaker Mike Johnson (R., La.), who has indicated the measure will need changes, potentially including provisions tightening America's southern border, to stand a chance of becoming law.

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

(END) Dow Jones Newswires

02-14-24 0558ET