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European Midday Briefing: Stocks Mixed as Investors Digest Fresh Data, Fed Minutes

MARKET WRAPS

Stocks:

European stocks were mixed on Thursday but investors remain cautious following the Federal Reserve's meeting minutes.

Investors hoping for any indication that Fed Chairman Jerome Powell and colleagues may be a touch more dovish were disappointed.

Policy makers agreed that they needed to keep raising interest rates enough to lower inflation, but signaled greater caution with the pace of coming increases.

"The best approach is for the FOMC to remain on message with its forecast until that forecast changes. Failure to do so allows the market to run wild with its own imagination. The central bank has spent the past three weeks trying to reel the market back from the dovish pivot speculation," said Mike O'Rourke, chief market strategist at Jones Trading.

These factors continued to reverberate on Thursday, with Norway's central bank giving the narrative an extra shove by raising rates by 50 basis points to 1.75%.

Data released Thursday showed the U.K.'s annual rate of inflation moved into double digits in July and is set to rise even higher by the end of the year, heaping greater pressure on stretched household budgets and threatening a lengthy economic contraction.

These have "poured cold water on the prospect that central banks were about to let up on hiking rates," Deutsche Bank analyst Henry Allen said. This sentiment is pushing investors away from "risk assets" once again, he said.

Economic Insight:

Norges Bank raised the key rate by 50 basis points on the back of a higher core inflation than expected, a decision which will likely be repeated next month, Nordea said.

Norges Bank had signaled in June that it would raise rates at Thursday's meeting by 25bp, but the larger hike was warranted after a stronger rise in core inflation over the summer, it said. For markets, the move came as no surprise, with rate markets expecting 50bp well beforehand.

"We believe that Norges Bank will deliver another 50bp rate hike in September, before resuming with 25bp hikes from November onwards," it said. Nordea sees Norway's key rate peaking at around 3.25%.

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Money markets are gearing up expectations for European Central Bank interest-rate rises after news of U.K. inflation hitting a four-decade high of 10.1% in July and after ECB Executive Board member Isabel Schnabel hinted at further rate rises in an interview with Reuters.

In July the ECB opted for a large 50 basis-point interest-rate rise in light of the inflation outlook and "at the moment I do not think this outlook has changed fundamentally," she said. Markets now price in 127bps of interest rate rises until year-end, versus some 110bps priced Wednesday, according to Refinitiv.

The ECB is "unlikely to pivot for now" and a 50 basis-point rate rise in September "remains the most likely outcome," Pictet Wealth Management said.

U.S. Markets:

U.S. stock futures inched lower as investors awaited economic data including jobless claims and home-sales figures, plus more major earnings.

Following the release of the Fed's minutes on Wednesday, investor concerns about central bank rate hikes have resurfaced.

The S&P 500, the Wall Street benchmark, by midweek had rallied more than 17% off its mid-June low as investors became more optimistic that a deceleration in consumer price rises could allow the Fed, and its peers worldwide, to be less aggressive in hiking borrowing costs.

However, the bounce saw stock indices looking overbought, according to momentum gauges like the S&P 500's 14-day relative strength index, and that left them vulnerable to disappointment.

Sure enough, resurgent fretting over central bank monetary policy tightening is being used as an excuse for profit taking.

"After a very strong run for risk assets thanks to a narrative that we might have seen 'peak inflation', Wednesday put a stop to that as multiple headlines came through that poured cold water on the prospect that central banks were about to let up on hiking rates," said Henry Allen, macro strategist at Deutsche Bank.

Data due for release on Thursday include the initial unemployment claims at 8.30 a.m. Eastern and existing home sales at 10 a.m. Eastern.

Nathan Sheets, global chief economist at Citi, said that even though financial markets had become more positive of late, "we remain concerned about the underlying fundamentals of the global economy. Our sense is that economic performance is likely to be plagued by high inflation, slowing real GDP growth, and rapidly tightening monetary policy for some time to come."

Estee Lauder and Kohl's are scheduled to release earnings before the opening bell while Applied Materials is set to report results after markets close.

Forex:

Fed minutes from Wednesday showed policy makers look content with the dollar's strength as they felt this helped suppress import prices and would therefore help bring down inflation, ING said.

"The Fed seems to welcome dollar strength and there were no linkages of dollar strength depressing any sectors in the U.S. economy," the bank said.

The Fed attributed the dollar's recent rise, especially against the euro, to interest-rate differentials and ING expects those differentials to widen further into year-end, keeping EUR/USD at levels between 1.00 and 1.02.

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The Norwegian krone rose after the Norges Bank raised interest rates by 50 basis points to 1.75% in a decision that many had expected, although some analysts had noted a possibility of a smaller 25 basis-point increase.

The Norges Bank said interest rates would likely rise further in September as inflation was "considerably higher than projected" while unemployment was very low and had fallen a little more than expected.

A markedly higher policy rate is needed to bring inflation back to target, Governor Ida Wolden Bache said in the accompanying press release. EUR/NOK falls 0.2% to 9.8564, down from 9.8831 before the decision.

Bonds:

The U.K.'s four-decade-high 10.1% annual inflation for July caused a repricing of market expectations of interest-rate increases by the Bank of England, and the cross-read for eurozone government bonds is that the market discounts similar upward pressure for coming HICP releases, Commerzbank said.

"10y Bunds [Bund yields] took out the 1% level effortlessly amid a flattening curve, before weakening equities helped Bunds to stabilize later in the session," it said, referring to Wednesday's moves. Subdued summer liquidity doesn't help and might remain an obstacle in Thursday's trading as well, Commerzbank said.

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The U.K. gilt curve has room to flatten further with the peak in inflation still to come and recession fears further on the rise, ING said. Core U.K. inflation might peak soon but ING expects the headline rate to hover around 12% from October, the rates strategists said after annual inflation hit a four-decade high of 10.1% in July.

In a market featuring widening bid-offer spreads, the Bank of England intends to embark on active quantitative tightening soon, the Dutch bank said.

"It will test market functioning as private investors will effectively have to absorb significantly higher amounts of government debt going forward," ING said. This factor muddies their call for a flatter curve, it added.

Energy:

Oil prices rose in early trading, with declining inventories in the U.S. helping to improve sentiment. "U.S. petroleum inventories including SPR declined 12.6 million barrels and crude exports surged to all-time-high levels," DNB Markets said--helping to improve sentiment on tight supply.

"Amid oil demand worries we highlight that implied U.S. oil demand increased sharply, up by 1.75 million barrels a day week on week to 21.22 million barrels a day, the highest level since February," it added.

Metals:

Metals prices fell in early trading, with central-bank hawkishness--particularly from the Fed--damping the sentiment that peak inflation is over.

Rising inflation rates in the U.K. and hawkish notes from the Fed among others "poured cold water on the prospect that central banks were about to let up on hiking rates," Deutsche Bank said.

This sentiment is pushing investors away from "risk assets" once again, the bank said.

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