European Midday Briefing : Sticky U.K. Inflation Weighs on Mood as Fed Minutes Eyed

MARKET WRAPS

Stocks:

European shares fell on Wednesday after higher-than-expected U.K. inflation reminded the market of stubborn price pressures in developed economies and as investors eyed minutes from the Federal Reserve's May meeting.

In the U.K., the inflation rate neared the Bank of England's 2% target in April, opening the way for a rate cut in the coming months, although prices of services continued to rise at a pace that will concern policymakers. Analysts had mixed views on whether the BOE would cut in June , following the data.

Stocks to Watch

The latest European bank results season showed that M&A in the sector looks plausible but focus should remain on domestic consolidation, Citi said, in fragmented regions such as the U.K., Italy and Spain.

Healthy balance sheets, greater regulatory certainty, still muted loan growth and less accretive buybacks could lead to more transactions. Citi said that cross-border M&A is less probable however, given the lack of common deposit insurance scheme and banking union as well as the lack of fungibility of capital and funding.

Economic Insight

High public borrowing is a blow for the U.K. government as it looks for scope to cut taxes ahead of general elections, Capital Economics said.

U.K. public-sector borrowing came in at more than GBP20 billion in April, higher than expected as spending rose faster than incomes following cuts to workers' taxes set out earlier this year by Chancellor Jeremy Hunt.

Hunt will be disappointed that sharp borrowing won't provide space for more cuts later this year, Capital Economics said.

Tax receipts are moreover likely to wane as the economy splutters, while higher market interest rates will limit any fiscal headroom further, it added.

U.S. Markets:

Investors will get an update on the market's hottest tech company when Nvidia reports results after the market close.

In recent trading, stock futures were little changed and benchmark yields edged higher, having settled on Tuesday at 4.414%.

Forex:

Sterling hit two-month highs against the dollar and euro after headline inflation in the U.K. fell less than expected.

The data was "good news for the pound" as it likely rules out a rate cut by the Bank of England in June, particularly as services inflation remains elevated, Vantage said.

"That [services inflation] is still very much too elevated for some Monetary Policy Committee officials to vote for a rate cut in June," Vantage said.

Bonds:

Eurozone government bond yields moved higher as U.K. inflation data suggest that an interest-rate cut by the Bank of England in June might be premature.

"The odds of a pause in rates being extended further have increased to the point where the market now views the June cut as clearly premature and is wondering if the BOE will hold off until late summer--or even longer," Ebury said.

Gilt yields also advanced.

"At the margin this makes it more difficult for the Bank of England to cut rates quickly," EFG Asset Management said.

The bond market reaction to an anticipated interest-rate cut by the European Central Bank in June is expected to be muted, Neuberger Berman said.

"We don't expect any government bond reaction in any country as the market already discounted few months ago such a cut."

The market should instead focus on the ECB analysis regarding first-quarter wage increase for the eurozone, as ECB members have identified this as their key criteria for inflation evolution, Neuberger Berman said.

Energy:

Oil prices fell more than 1% on signs of market weakness, Federal Reserve rate cut fears and easing geopolitical tensions.

Refinery margins in the U.S. have fallen sharply and gasoline demand in the country is seasonally tracking at its lowest level since 2020, ANZ Research said.

The fall in prices also follows the latest U.S. crude oil inventories data, which showed stockpiles rose 2.5 million barrels in the week ended May 17, surprising the market. At the same time, cautious statements from Fed officials have lowered hopes for interest-rate cuts this week, prompting market concern that high rates for longer will weigh on demand.

Metals:

Metal prices were weaker across the board, retreating after record highs earlier this week, as traders take profit, SP Angel said..

EMEA HEADLINES

Marks & Spencer Records Best Profit in 10-Years As Reshape Plan Progresses

Marks & Spencer Group has reported its highest pretax profit in over ten years as its reshape plan continues to boost its performance, with higher sales in both its clothing and home, and food divisions.

For the period ended March 30, the U.K. retailer booked pretax profit of 672.5 million pounds ($854.7 million), compared with GBP475.7 million in the prior year. The result compares with analysts' forecasts of GBP681 million, according to a poll of estimates compiled by FactSet.

EU Car Registrations Jump on Growth in Major Markets, Extra Sales Days

New car registrations in the European Union jumped in April, driven by strong performance in major markets and the benefit of two extra selling days.

Registrations, which reflect sales, rose about 14% on year, the European Automobile Manufacturers' Association said Wednesday. Consumers in Spain, Germany, France and Italy boosted the EU car industry after a slump in March. An early Easter holiday also helped, giving April two extra days of sales compared with a year ago, ACEA said.

Chinese Business Group Warns of Tariff Increases on Car Imports in Response to U.S., EU Moves

A Chinese business group warned of possible tariff increases on car imports in retaliation for moves taken by the U.S. and European Union on Chinese electric vehicles, as trade tensions escalate between China and the West.

The Brussels-based China Chamber of Commerce to the EU said in a statement Tuesday that it had been informed by insiders that Beijing is considering temporary extra tariffs on imported cars equipped with large-displacement engines.

GLOBAL NEWS

Fed Is In 'Risk Management' Mode with Rate Policy, Regional Presidents Say.

Federal Reserve officials continued to preach patience on Tuesday night, saying they are still looking to gather more information to gain greater clarity around the future path of inflation.

Until they do, the risk of keeping the benchmark federal funds rate steady is fairly minimal, said a trio of Federal Reserve Bank presidents, given that the current rate is positioned to provide flexibility.

Japan's 10-Year Government Bond Yield Hits 1%, An 11-Year High

Japan's 10-year government bond yield climbed to 1% for the first time in 11 years, propelled by growing expectations that the country's central bank may take further tightening steps in the coming months.

The 10-year yield briefly touched the psychological threshold of 1.0%, its highest level since May 2013.

Risky Bonds Join the Everything Rally

If the U.S. economy is headed for trouble, no one told the junk-bond market.

The premium that investors demand to hold debt from sub-investment-grade companies instead of relatively safe Treasurys has shrunk to near pandemic-era lows, a sign of dwindling worries about an economic slowdown that would cause a big jump in defaults and bankruptcies.

U.S. Says Historic Israel-Saudi Normalization Deal Within Reach but Israel Might Balk

WASHINGTON-Biden administration officials said Tuesday that a U.S.-brokered deal to normalize relations between Israel and Saudi Arabia was within reach, but that Prime Minister Benjamin Netanyahu's government might balk at the historic agreement rather than accept Riyadh's demands for a new commitment to a Palestinian state and a halt to the Gaza war.

"The Saudis have been clear that [normalization] would require calm in Gaza and it would require a credible pathway to a Palestinian state," Secretary of State Antony Blinken told the Senate Foreign Relations Committee Tuesday. "It may well be that in this moment Israel isn't able or willing to proceed down that pathway."

Western Officials Brace for Volatile Iran After Raisi Death

Western officials say they are braced for a period of increased volatility with Iran as the country prepares to choose a successor to President Ebrahim Raisi, who died in a helicopter crash over the weekend. But they said they don't expect Tehran to make major foreign-policy shifts.

Iran, where ultimate authority lies with Supreme Leader Ayatollah Ali Khamenei, is likely to stay on its current trajectory, deepening ties with China and Russia, supporting Hamas and other regional militias and pursuing its nuclear program, officials in Washington and European capitals said.

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

(END) Dow Jones Newswires

05-22-24 0549ET