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EUROPEAN MIDDAY BRIEFING - Stocks Flat as Investors Await Fed Decision

11/03/2021 | 06:21am EST

MARKET WRAPS

Stocks:

European stocks were flat Wednesday as gains in materials and information technology sectors were balanced by losses in healthcare and consumer staples sectors.

Investors' eyes are on the Federal Reserve, which is set to conclude its two-day meeting later in the day. Officials are expected to announce the beginning of the end of their $120 billion-a-month bond-buying program but keep rates unchanged despite growing disquiet about inflation.

Chairman Jerome Powell's postmeeting press conference is likely to be closely followed by investors looking to see if the central bank chief addresses the surge in consumer prices and offers hints about the pathway for interest rates. Mr. Powell is likely to double down on his view that inflation is being driven by supply-chain bottlenecks that should ease in time, said Mr. Gimber.

"What Powell has to achieve today is to separate out the timing of the tapering decision from the timing of future rate increases," said Mr. Gimber. "They want to stress they are data dependent, and they are willing to be patient."

Meanwhile, the European Central Bank's Christine Lagarde said it was "very unlikely" conditions would be met by next year that would allow for an interest-rate hike.

"Market interest rates have risen over the past weeks, mainly as a result of greater market uncertainty about the inflation outlook, spillovers from abroad to policy rate expectations in the euro area, and some questions about the calibration of asset purchases in a post-pandemic world," she said in Lisbon.

The Bank of England is more likely to wait until December or February to deliver its first post-pandemic rate rise, said Peder Beck-Friis, portfolio manager at Pimco. Markets are almost fully pricing in a 15 basis-point rise to 0.25% on Thursday, when the Monetary Policy Committee is due to announce their policy decision.

"We have low conviction in the precise timing of the first hike," Beck-Friis told Dow Jones Newswires. "Either the BoE increases its policy rate on Thursday, or slightly more likely in our view, sends a strong signal that it will hike in December or February." He expects the bank rate to reach a pre-pandemic level of around 0.75% by the end of 2022, unless above-target inflation persists.

Shares on the move:

Raiffeisen posted strong 3Q results that should drive upgrades to consensus forecasts on earnings, Citi analysts said. The Austrian bank's 3Q net profit almost doubled on year, beating a company-compiled consensus by 35%.

The result was driven by lower provisions and better core revenue, Citi said. Raiffeisen posted strong net interest income--a key metric for retail banks--thanks to higher volumes, mainly in Russia, Romania and the Czech Republic, rate increases in Russia, the Czech Republic and Hungary, and favorable foreign-exchange rates, Citi said. Shares rose 5.3%.

Data in focus:

The shortage of materials in German manufacturing has lessened, but only slightly, the Ifo Institute said. In October, 70.4% of companies complained about bottlenecks and problems procuring intermediate products and raw materials, a drop of 7 percentage points from September.

"It would be wrong to describe this as an easing, especially because companies expect the shortages to persist well into the new year," Ifo's head of surveys Klaus Wohlrabe said.

According to the Ifo survey, manufacturing companies expect these problems to continue for another eight months on average. In the chemical and automotive industries, 10 months of difficulties are expected. The shortest period of problems, 5.5 months, is expected in the food industry, Ifo said.

U.K. services activity grew at a faster pace than previously thought in October but business optimism fell to its lowest level since March, according to the IHS Markit/CIPS purchasing managers' index survey.

"Escalating business costs remain deeply concerning as salaries rocketed along with fuel and energy costs and material shortages as a result of supply chain disorder," CIPS director Duncan Brock said.

Many supply chain managers struggled to find the right staff from a falling number of job seekers, he said. An expected U.K. interest rate rise on Thursday could ease inflation but also add pressure on some household budgets, he said. October's services PMI was revised to 59.1 from 58.0 previously, versus 55.4 in September, indicating growth.

U.S. Markets:

Stock futures hovered as investors awaited the conclusion of the Fed and a raft of economic data.

Stocks have surged in recent weeks, lifted by corporate earnings that have given investors confidence that businesses are charting a strong recovery. The reports have helped soothe lingering fears that snarled global supply chains and rising prices might drag on companies and crimp economic growth.

"Earning season has been very strong and the beats have been extremely robust," said Hugh Gimber, a strategist at J.P. Morgan Asset Management. "Despite the fact that there have been lots of concerns about price pressures and supply bottlenecks there is no sign that any of that is going through into margins."

Companies popular with traders on Reddit's WallStreetBets page rose ahead of the opening bell. Bed Bath & Beyond surged over 60%. The company, which on Tuesday announced a partnership with grocery chain Kroger, was among the most discussed companies on the forum, according to sites that track mentions of ticker symbols. Other meme-stock favorites GameStop and AMC rose over 5%.

In out-of-hours trading, Activision Blizzard fell over 10% after the videogame maker said the release of two of its titles would be delayed. Ride-hailing firm Lyft jumped over 12% after saying revenue climbed in the latest quarter as demand for its services returned.

CVS Health and Marriott International are among the companies set to report earnings ahead of the opening bell Wednesday. Qualcomm and Fox are set to release quarterly figures after markets close, while Costco Wholesale will release sales data.

Investors also have a raft of economic data to digest. ADP's employment report is due to be released at 8:15 a.m., followed by figures on factory orders and a gauge of service-sector activity at 10 a.m.

Forex:

The Fed is widely expected to announce the start of asset-purchase tapering later and the dollar's reaction will depend on whether it hints at the timing of a first interest-rate increase, UniCredit said.

"Should the Fed fail to offer new clues on this today (we do not expect any), the benefit the dollar may obtain from a formal announcement that the tapering plan would be starting this month may actually prove not too large and a 'sell-the-fact' logic may even prevail," it said. In this event, EUR/USD and GBP/USD may avoid additional selling pressure below 1.15 and 1.36 respectively, it said.

The Bank of England may unexpectedly hold off on raising interest rates at Thursday's meeting, causing sterling to extend its recent losses versus the euro, Danske Bank said.

"We continue to see either an unchanged Bank Rate or a dovish hike as the most likely outcomes on Thursday when the Bank of England announces its monetary policy decision (no rate hike being our base case), which would send EUR/GBP further up," Danske Bank analyst Lars Sparreso Lykke Merklin said.

A 'dovish hike' would mean the BOE raising interest rates but issuing a cautious message that could dampen expectations for further rate increases.

Bonds:

T. Rowe Price will be on the lookout for comments by Fed Chairman Jerome Powell on whether interest rates can be raised during the process of tapering its bond purchases, Nikolaj Schmidt, chief international economist at the asset manager, said.

"I do not expect that Powell will endorse this but he may give us some indication that the FOMC would be willing to change, in particular accelerate, the pace of tapering should this be needed," he said. The FOMC has a strong preference for a predictable taper process, according to T. Rowe Price, for which the main risk is that the FOMC might opt for an accelerated process should inflation pressures surprise on the upside, Schmidt said.

Investors should keep an eye on discomfort around the "inflation is temporary narrative" at the Federal Reserve's meeting, said Nikolaj Schmidt, chief international economist at T.Rowe Price.

"As time has passed and inflation has remained stubbornly too high for comfort, I believe that the members of the FOMC have lost some of their confidence in the idea that inflation is all temporary," he said. As supply-chain bottlenecks are likely to extend for some time to come and services inflation is set to increase due to rents, the temporary narrative will become increasingly challenging for the FOMC to preserve, Schmidt said. If the Fed is forced to take a more assertive stance on inflation, the economist would expect some hints at this at the coming meeting, he added.

The risk has increased that the ECB will be forced into a swifter policy turn, said Martin Wolburg, senior economist at Generali Investments, although he doesn't expect a first interest-rate rise in 2022.

The key message at the ECB's October meeting last week was that the ECB continues to stick to its view of higher inflation being transitory, even as it acknowledges that the abating of inflation takes longer than previously thought, Wolburg said.

"While markets remained more sceptical about the inflation outlook, we stick to our view that there will be no hikes in 2022," Wolburg said. "That said, the risks that the ECB is pushed into a more hawkish stance increases the longer the inflation spike lasts," he said.

Commodities:

Oil prices were down on the back of bearish U.S. inventory data released late Tuesday, according to DNB Markets' Helge Andre Martinsen. Crude oil stocks rose by more than expected, while gasoline stocks shrank by less than expected, he said.

(MORE TO FOLLOW) Dow Jones Newswires

11-03-21 0720ET

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