MARKET WRAPS
Stocks:
European stocks fell as the volatility driven by higher-than-expected inflation data extends into a second day.
Stocks have traded choppily this week, buffeted by earnings reports and shifting expectations about the prospective pace of central banks' monetary tightening.
Data on Thursday showed that U.S. inflation hit 7.5% in January, a four-decade high. A Federal Reserve official said the central bank may have to move more drastically to curtail consumer prices, spooking investors. The S&P 500 is now on track for its worst weekly performance since mid-January.
"Inflation is currently in the public eye, it has become a political question," said Florian Ielpo, head of macro at Lombard Odier Investment Managers. "This is something that is concerning us, we have a rising risk of monetary policy mistakes. This is the number one risk we see in 2022."
Shares on the move:
Shares in premium-car maker Mercedes-Benz rose after the German company said it beat its own expectations for 2021. Mercedes-Benz, which changed its name from Daimler recently after spinning off its trucks business, targeted 10% to 12% of adjusted return on sales for the Mercedes-Benz Cars & Vans segment for the full year and now expects around 12.7%.
For the fourth quarter of last year, it sees the car business's adjusted return on sales at 15%, boosted by solid net pricing, good product mix and favorable used-car performance. Shares in Mercedes-Benz are 2.4% higher.
Stocks to watch:
Little positive newsflow lies ahead for Delivery Hero until the end of the year, when the German food-delivery firm will need to provide reassurance on reaching profitability for the first time, Bryan Garnier said, cutting its rating on the stock to neutral from buy.
Delivery Hero shares plunged Thursday after forecasting a wider earnings loss for 2022, and real concerns remain over how the company can reach breakeven, Genelot said.
The next possible catalyst for the stock won't come until the end of the year, when it will have to prove profitability in its core business in 4Q, as previously guided, he added. The investment bank cuts its target to EUR100 from EUR160. Shares tumbled a further 12%.
Data in focus:
The 0.2% fall in the U.K.'s GDP in December due to Omicron is likely to be reversed soon as Covid-19 cases fall, but growth will be subdued in the next months amid a squeeze in incomes, Capital Economics's chief U.K. economist Paul Dales said.
The economy likely contracted again in January, but real-time data suggests that activity recovered from mid-month, he said. However, a 2% fall in real household disposable incomes due to higher prices and taxes in April is set to restrain economic growth, Dales said.
"With inflation soaring, we doubt this [lower growth] will prevent the Bank of England from raising interest rates from 0.50% to 1.25% this year and perhaps to 2.00% next year," he said.
A slower growth outlook in the U.K. is one of the reasons that could prompt policy makers to deliver less tightening than markets currently expect the over coming months, ING's developed-markets economist James Smith said.
The Bank of England is on track to increase rates at its next two meetings, in March and May, but the effects of the cost-of-living crisis to consumer spending and economic growth could pause the tightening process afterwards, he said.
"Disposable incomes are set to decline noticeably this year on a combination of tighter fiscal policy and to a greater extent, higher inflation," ING said.
U.S. Markets:
Stock futures fell and bond yields largely rose, suggesting that the volatility driven by higher-than-expected inflation data would extend into a second day.
Stocks have traded choppily this week, buffeted by earnings reports and shifting expectations about the prospective pace of central banks' monetary tightening. The S&P 500 is now on track for its worst weekly performance since mid-January.
"Inflation is currently in the public eye, it has become a political question," said Florian Ielpo, head of macro at Lombard Odier Investment Managers. "This is something that is concerning us, we have a rising risk of monetary policy mistakes. This is the number one risk we see in 2022."
Earnings season is ongoing, with private-equity firm Apollo Global Management, utility company Dominion Energy and steel producer Cleveland-Cliffs set to post earnings before markets open. Meanwhile, the University of Michigan's consumer sentiment gauge for February is due at 10 a.m. ET.
Forex:
After Thursday's news that U.S. inflation rose to a four-decade high in January, the dollar is in a good position to rise against currencies of countries where central banks are less likely to raise interest rates quickly, said ING.
The yen and krona stand out as examples, possibly along with the euro after Christine Lagarde warned against raising rates too quickly.
"If the Fed is to step hard on the monetary brakes, we would certainly favour the dollar against the low yielders backed by central bankers who have firmly placed themselves in the dovish camp," said ING currency analysts.
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The euro fell after the ECB's Lagarde pushed back against speculation for a faster-than-expected interest rate rise.
Lagarde told German media network Redaktionsnetzwerk Deutschland that the ECB wouldn't rush into lifting rates.
"For now, Christine Lagarde insists that acting too fast could choke the economy's recovery, but not acting at all will choke the economy, as well," Swissquote Bank analyst Ipek Ozkardeskaya said. EUR/USD should rise as eurozone inflation may become "unbearable," prompting the ECB to act, she said.
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The Bank of England remains on track to raise interest rates two more times this year after the latest U.K. economic growth data and this should support sterling, UBS Global Wealth Management economist Dean Turner said.
Notwithstanding the euro's recovery following the ECB's signal of earlier rate rises last week, UBS still expects sterling to rise against the euro, he said.
"The higher positive yield on sterling assets should continue to find favor amongst investors." The U.K. economy grew 1.0% quarter-on-quarter in the 2021 fourth quarter, the same as the previous quarter. Economists polled by the WSJ expected 1.1% growth.
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Cryptocurrencies edged down for a second consecutive day. Bitcoin slipped 1.1% from its level at 5 p.m. ET Thursday, trading at around $43,250. It has risen over 12% in February.
Bonds:
The European Central Bank's shift away from its loose policy stance adds "significant risk" to eurozone periphery bonds, which the market is still coming to terms with, said Citi rates strategist Jamie Searle.
The trend is likely to be wider government bond yield spreads for the rest of the year, he said. For the 10-year Italian BTP-German Bund yield spreads, Citi sees 200 basis points as the first target, he added.
Meanwhile, the 10-year BTP-Bund yield is trading about 5 basis points wider at 165 basis points, according to Tradeweb. Eurozone government bond spreads over Bunds trade wider across the board, while Italy is underperforming.
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There is room for eurozone government bond yield spreads to widen further into the ECB's monetary policy meeting in March, said Barclays' rates strategists.
A faster taper of the ECB's asset purchases is "firmly" on the table, they added. However, given the emphasis the ECB is now placing on flexibility, Barclays' strategists do not rule out the possibility of a purely open-ended approach to QE being implemented after March, or a more direct announcement that net purchases under the Asset Purchase Programme will end as early as June, they added.
"This would enable net QE purchases to potentially be halted--and policy rates increased--before the end of the summer," they said. Such changes would imply a "meaningfully" less market-friendly supply-demand outlook for peripheral government bonds, they added.
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Societe Generale's rates strategists raise their target for the 10-year Bund yield for 2022 after the market re-pricing of ECB interest rate-rise expectations drove the yield above their baseline level of 0.25%, they said.
They now target the 10-year Bund yield between 0.40%, which is their baseline, and 0.60%, which is their upside estimate, for the remainder of the year, they say.
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European corporate bond markets face a challenging session after above-forecast U.S. inflation data Thursday triggered a steep selloff in U.S. Treasury debt, said UniCredit Research. U.S. inflation hit the highest level in 40 years in January as prices rose 7.5% from 2021.
"The disappointing U.S. inflation data are creating a challenging environment for today's session in European corporate credit," analysts said.
Stock markets rack up losses as appetite for risk fades, indicating "we are likely to see cautiousness returning across credit market segments, with hybrids and high yield credit likely to underperform," they said.
Commodities:
Oil prices rose after the International Energy Agency said that OPEC supply issues are worsening, threatening to tighten the market further and push prices higher. The IEA said in its monthly report that the cartel and its allies, known together as OPEC+, had undershot their supply targets by 900,000 barrels a day last month.
The supply challenges mean 300 million barrels of oil have effectively been lost from the market since 2021, the IEA said. It added that the number could rise to 1 billion barrels this year if OPEC members with spare capacity don't step in to make up for the shortfall.
Fitch said Brent will likely face downward pressure on expectations of increased supply and easing oil-demand growth.
While Brent prices are being squeezed by a "fundamentally tight" market, Fitch said higher production quotas by OPEC+ and large additions by non-OPEC countries including the U.S. should ease market tightness over 2022. Successful Iranian negotiations should also bring the country's oil exports back to the market.
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02-11-22 0630ET
