EMEA Morning Briefing : ECB Expected to Hold Rates

MARKET WRAPS

Watch For:

ECB rate decision; Germany balance of payments; trading update from Givaudan

Opening Call:

European stock futures were mixed as Asian equities tracked U.S. indexes lower. The dollar and Treasury yields retreated slightly; while oil and gold futures advanced.

Equities:

Stock futures were mixed early Thursday. A fresh inflation shock in the U.S. drove investors to abandon bets that the Federal Reserve will cut interest rates three times in 2024.

Wednesday's U.S. CPI reading marked the latest in a series of readings showing persistent growth and lingering inflation that has forced investors to reconsider when the Fed will shift from raising interest rates to cutting them.

RBC Capital Markets said hot CPI prints from now will just be a confirmation of the new trend, and it'll take more than one low print to shift the narrative back to slowing inflation.

Markets will need to see 0.2% on-month CPI prints in both the April and May reports for renewed evidence of a sustainable trend lower in price pressures, RBC added. RBC isn't forecasting those kinds of low numbers.

Focus turns to the European Central Bank's rate decision today, where it is expected to leave rates unchanged. The ECB may give clues about whether it's ready to start lowering borrowing costs at its next meeting in June.

Economists have been expecting both the ECB and the Fed to start cutting rates in June. That's still the baseline for the ECB.

Forex:

The dollar retreated slightly after hot U.S. consumer prices and the prospect of a longer period of tight monetary policy sent the dollar higher overnight.

D.A. Davidson said the Fed was right to signal the "for longer" part of the rate equation is still in play. "June rate cuts are now in doubt, and chances for subsequent cuts later in the year are being reduced as we are still well above the Fed's 2% inflation target," it added.

Bonds:

Treasury yields stabilized in Asia after jumping by the most in at least a year overnight following hotter-than-expected U.S. inflation data, which could delay interest rate cuts by the Fed.

Sticky inflation "could weaken the Fed's confidence about how quickly inflation will converge to 2.0% on a sustainable basis," Bank of America said. "Altogether, we retain our outlook for a rate cut in June, but with low confidence."

Energy:

Oil futures rose slightly in Asia, supported by potential oil-supply disruptions in the Middle East. U.S. intelligence reports show that an attack on Israeli assets by Iran or its proxies could be imminent, U.S. officials said Wednesday, as the top American military commander for the Middle East headed to Israel to coordinate a response.

Geopolitical tensions have amplified bullish sentiment toward crude oil prices, said Sucden Financial.

Metals:

Gold prices edged higher early Thursday. Stronger-than-expected U.S. CPI data has put some pressure on gold prices, but safe-haven demand given rising geopolitical risks may support, ANZ said. Physical demand has also been stronger recently, driven by central banks' purchases to diversify reserves away from the U.S. dollar.

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HSBC thinks commodity prices have passed their trough. The bank points to oil prices rising above $90 a barrel, their highest since October 2023, and lifts in copper, tin, nickel and zinc prices. Iron-ore prices have also bounced back above $100/ton.

"An aggregation of the team's forecasts suggests that the global commodity price index is projected to be 4% higher in 2024 than in 2023, on average," HSBC said.

Indicators suggest industrial activity is improving and global trade is showing some signs of picking up. Geopolitics are affecting supply, and HSBC highlights that commodity prices, while elevated in nominal terms, have already fallen back to around their long-run average levels in real terms.

TODAY'S TOP HEADLINES

China's Consumer Inflation Cools Sharply as Holiday Boost Subsides

China's consumer inflation cooled sharply in March as the holiday boost to food and travel prices waned, possibly reigniting concerns over deflation amid lukewarm domestic demand.

The consumer-price index rose 0.1% in March from a year earlier, compared with the 0.7% increase in February, the National Bureau of Statistics said. A Wall Street Journal poll of economists had tipped 0.4% growth.

Fed Rate Cuts Are Now a Matter of If, Not Just When

Another firmer-than-anticipated inflation report delivered a meaningful setback Wednesday to the Federal Reserve's hope that it could buoy prospects of a so-called soft landing by dialing back some of the past year's interest-rate increases.

Solid hiring and the prospect that inflation might settle out closer to 3% than the Fed's 2% goal could call into question whether the central bank will be able to cut rates until much later in the year without evidence of a sharper slowdown in the economy.

Hotter inflation means the stock-market rally faces a critical test as earnings season begins

Investors are abandoning bets that the Federal Reserve will cut interest rates three times in 2024, removing a critical safety net for stocks.

Now, to prevent a recent selloff from accelerating, companies will likely need to deliver earnings growth on par with Wall Street's expectations. Otherwise, they risk tripping up a rally that carried the S&P 500 nearly 30% higher over the five months that ended in March, according to FactSet data.

Fed Prepares Slower Pace of Runoff for $7.4 Trillion Portfolio 'Fairly Soon'

Federal Reserve officials neared agreement last month on a plan to slow the runoff of their $7.4 trillion in asset holdings, according to minutes of their meeting released Wednesday.

At issue is a program the central bank initiated two years ago to passively reduce those holdings by allowing bonds to "run off" its balance sheet without buying new ones. It acquired trillions in Treasurys and mortgage bonds to stabilize financial markets in 2020 and to provide additional stimulus in 2021.

Switzerland Moves to Hike UBS Capital Requirements

Switzerland said UBS will have to substantially raise its capital levels to comply with new rules aimed at preventing a repeat of Credit Suisse's near-collapse last year.

The country's federal council on Wednesday proposed new powers over banks and their senior executives, and better backstop measures for banks running low on cash. The changes would let supervisors intervene sooner at troubled banks and hold senior executives to account for excessive risk-taking, including by clawing back compensation. The council is also examining letting the regulator, Finma, apply fines for the first time.

U.S. Warns of Imminent Attack on Israeli Assets by Iran or Proxies

WASHINGTON-U.S. intelligence reports show that an attack on Israeli assets by Iran or its proxies could be imminent, U.S. officials said Wednesday, as the top American military commander for the Middle East headed to Israel to coordinate a response.

Iran has publicly threatened to retaliate for a strike in Syria on an Iranian diplomatic building in Damascus last week, presumed to be the work of Israel, that killed top Iranian military officials, including a senior member of the Islamic Revolutionary Guard Corps' elite Quds Force.

KPMG Fined Record $25 Million in Exam-Cheating Scandal

KPMG's Netherlands unit agreed to pay a $25 million fine over claims of exam cheating and misinforming investigators, the largest monetary penalty imposed on an auditing firm by the Public Company Accounting Oversight Board.

KPMG Accountants NV failed to take adequate steps to identify and investigate misconduct in which employees provided answers or access to questions on exams, in violation of the PCAOB's quality-control rules, the U.S. audit regulator said Wednesday. The tests for the firm's mandatory training courses, which cover topics such as U.S. audit standards, professional ethics and independence, are aimed at helping auditors maintain their professional certifications to perform certain types of audits.

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Expected Major Events for Thursday

06:00/NOR: Feb Monthly GDP

06:00/ROM: Mar CPI

06:30/HUN: Mar CPI

07:00/SVK: Feb Construction production

08:00/BUL: Feb Trade with third countries - preliminary data

08:00/BUL: Jan Trade with EU Member States - preliminary data

08:00/ITA: Feb Industrial Production

08:00/EU: Mar Long term interest rates statistics

08:30/UK: 1Q Bank of England's Bank Liabilities Survey

08:30/UK: 1Q Bank of England Credit Conditions Survey

09:00/MLT: Feb Industrial Production Index

10:00/IRL: Mar CPI

12:15/EU: ECB interest rate announcement

16:59/GER: Feb Balance of Payments

16:59/AUT: Apr OPEC Monthly Oil Market Report

All times in GMT. Powered by Onclusive and Dow Jones.

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

(END) Dow Jones Newswires

04-11-24 0017ET