By MarcJones
LONDON (Reuters) – It was another day on inflation patrol for investors on Wednesday, as stronger-than-expected US data pushed equities sideways and the dollar higher, while a slowdown in the UK exchange rate sent the pound slippery.
Wall Street looked set for an early fall after the US CPI read of 6.4% the day before, but Europe’s main stock markets edged slightly higher after the corresponding UK inflation rate fell to 10.1% from 10.5% was.
This pushed the pound back towards $1.20 against the dollar and led to the biggest drop in UK 10-year gilt yields in almost two weeks, albeit after two sizeable rises in global bond yields in recent sessions. [GVD/EUR]
Oil prices also fell again [O/R]as did banks, as a series of problems at one of the UK’s largest lenders, Barclays, saw its share price fall by 10%.
Gucci-owner Kering fell as much as 2% according to its results, while a €800 million buyback and dividend hike lifted Europe’s biggest food retailer Carrefour 8%, and there were gains of 0.8% to 1% in the US Sectors technology, chemicals and cars. [.EU]
“Today’s UK inflation data is likely to give a sigh of relief,” said Hugh Gimber, a global markets strategist at JP Morgan Asset Management, referring to the Bank of England’s rate setting committee.
However, robust pay rise data this week, showing the 12th straight month of stronger-than-expected growth, indicated that overall inflationary pressures remain strong.
“We see interest rates of 4.5% as the minimum needed to bring inflation back on target in the coming quarters,” Gimber added.
Despite Europe’s resilience, the MSCI global 47-nation gauge was down 0.2%, with S&P 500 futures markets suggesting Wall Street later opened 0.3% lower. [.N]
The focus there will likely be the January retail sales figure, due at 8:30am ET, to provide clues to consumer spending amid concerns about slowing economic growth and high inflation. A Reuters poll expects a 1.8% rise after a decline in December.
US consumer inflation on Tuesday came in at 6.4% yoy for January. That was higher than the 6.2% expected by economists and sparked selling in the bond market and Fed fund futures as hopes of a rate cut later this year were dampened.
Fed fund futures now imply a mid-year high above 5.2% and year-end rates above 5%.
Two-year government bond yields, which rise when the underlying bond falls in price, stabilized at 4.59% in Europe after rising to 4.61% overnight. That had also widened the premium or “inversion” over 10-year yields — an unusual phenomenon that historically often signals an approaching recession.
CHART: Inflation Surprise Indices (https://fingfx.thomsonreuters.com/gfx/mkt/egvbyadnopq/Pasted%20image%201676463382510.png)
SWIMMING IN OIL
Turkey’s stock index rose nearly 10% as it reopened on Wednesday after a five-day shutdown following an earthquake that killed more than 40,000 there and in neighboring Syria.
Turkish authorities on Tuesday introduced measures to support the market, including an incentive for companies to buy back their shares and another encouraging pension funds to buy shares.
MSCI’s broadest index of Asia-Pacific stocks outside Japan ended down 1.5%, led by falls of around 1% in Australia and Hong Kong. Japan’s Nikkei stock average fell 0.4%, reversing a small early gain. [.T]
After a strong start to the year, global equity markets appear to have faltered and analysts are now wary of a retracement.
“Combining this previous (US) Fed rhetoric trying to keep interest rates higher for longer and the recent CPI numbers, it seems likely that equity markets, both in the developed world and in the Asian markets, should come to some degree of moderation,” said Manishi Raychaudhuri, Head of Asia Pacific Equity Research at BNP Paribas.
He said the dollar may also regain some strength against emerging market currencies, helped by the prospect that US interest rates will remain high.
The dollar hit a six-week high of 133.66 Japanese yen, up $1.0699 against the euro and 1% against the pound.
It had a bumpier ride against other currencies after the CPI data but appears to be past its January round.
The Australian dollar fell 1.3% to $0.689, despite Central Bank Governor Philip Lowe reiterating that Australian interest rates need to rise further.
In the other direction, the People’s Bank of China increased its liquidity injections by rolling over maturing policy loans and adding more funds while leaving the interest rate unchanged.
Meanwhile, oil prices fell as traders worried about rising supply and the prospect of higher interest rates, which would slow the global economy and weaken demand.
U.S. crude inventories rose by a more-than-predicted 10.5 million barrels before official Energy Information Administration (EIA) data was released at 1530 GMT, according to market sources citing figures from the American Petroleum Institute (API).
Brent crude futures were even down 1.3% to $84.45 a barrel, while US West Texas Intermediate (WTI) crude fell 1.7% to $77.75 before regaining some ground.
Also putting pressure on crude was this week’s US announcement that it would sell 26 million barrels of oil from the country’s strategic reserves, already its lowest level in about four decades.
“Put simply, the US is swimming in oil,” said Stephen Brennock of oil brokerage PVM.
(Additional reporting by Xie Yu in Hong Kong and Alex Lawler in London; Editing by Kim Coghill and John Stonestreet)
