EMEA Morning Briefing : Powell Says Fed Still Expects Inflation to Ease

MARKET WRAPS

Watch For:

Eurozone Long Term Interest Rates; OECD Composite Leading Indicators; U.K. Unemployment, BOE's Bank Liabilities Survey, Credit Conditions; Italy CPI; OPEC Monthly Report; Jerome Powell presents Monetary Policy Report to Senate Banking Committee; updates from Alstom, SEB, Finnair, Norwegian Air, Investor, Severn Trent, Experian, X5 Retail, BT Group, Meggitt

Opening Call:

European shares may struggle for gains on Thursday despite relatively dovish comments from Jerome Powell. In Asia, stocks were mixed following the latest Chinese GDP data, the dollar edged higher but Treasury yields and oil prices weakened.

Equities:

European stocks may add to Wednesday's modest losses when trading resumes, despite a mostly higher finish on Wall Street after a reassurance from Jerome Powell that the time isn't right to pull back Fed monetary support.

U.S. stock indexes closed near record territory after Powell kicked off two days of testimony in which a sharp rise in inflation has been a key focus. The Fed chief said the labor market, although improving, has a long way to go toward recovering from the pandemic, despite recent record high job openings. He stressed that inflation will moderate and that the central bank plans to maintain its current monetary policies.

Importantly, Powell said he was closely monitoring the current hot pace of inflation and that "we would absolutely change our policy," if rising costs uprooted his expectations.

"We're seeing a continuation of investors moving out of the reflation trade and money moving into secular growth areas of the market," said Keith Lerner, chief market strategist for Truist Advisory Services. "We're in this transitional period where there are a lot of questions...On an overall basis, the market is trading a bit more cautiously underneath the surface."

Asian stock markets were mixed on Thursday as data showed China's economic rebound slowed in the second quarter but continued to show unusual resilience more than a year after the country largely got control of the coronavirus within its borders.

Stocks to Watch: NortonLifeLock is in talks to buy cybersecurity firm Avast in a deal that would expand the U.S. company's focus on consumer software. Avast said late Wednesday that the two were in advanced discussions about a cash-and-stock deal after The Wall Street Journal reported on the talks earlier Wednesday. A deal could be completed this month, assuming talks don't fall apart, according to people familiar with the matter. Avast has a market value of around GBP5.2 billion. Assuming a typical deal premium, the deal could value the cybersecurity firm at more than $8 billion.

Forex:

The dollar strengthened slightly in Asia as investors continued to react to Jerome Powell's testimony to Congress. He said the dollar doesn't have a good reserve currency competitor, and isn't in danger of losing its crown.

HSBC said the recent trimming of short-seller bets against the dollar is unlikely to be sustained. "To make us think differently, we would need to see stronger signs that the USD is behaving in a pro-cyclical manner, which is not yet obvious."

For example, the dollar weakened after the June U.S. nonfarm payrolls report beat expectations and it strengthened after the June ISM services data disappointed, said HSBC's analysts. Normally when the foreign exchange market is focused on the timing of the Federal Reserve's monetary policy tightening, the dollar rises in response to strong U.S. data and weakens otherwise, they added.

Separately, HSBC said the Swiss franc is likely to weaken in coming months as the global recovery reduces demand for safe havens and the Swiss National Bank maintains loose monetary policies and continues foreign currency interventions.

"With inflation still persistently low and likely to stay there, despite a strong economic rebound, we do not see conditions being met for the central bank to allow or encourage CHF strength," said HSBC's analysts.

Meanwhile, the market will soon bring forward interest rate rise expectations for other countries, further weighing on the franc. By year end, HSBC expects USD/CHF to rise to 0.94, from 0.9161 currently; and EUR/CHF to rise to 1.16, from 1.0834 at present.

Commerzbank expects the Russian ruble to strengthen in coming months as the central bank raises interest rates but the gains won't last. Russia's central bank is staying ahead of the curve by raising interest rates and the benchmark rate is likely to rise to 6.50% by year-end from the current level of 5.50%, said Commerzbank currency analyst Tatha Ghose.

Higher rates combined with a more supportive oil price outlook and calming geopolitical risks should allow USD/RUB to fall to 72.0 by year-end from 74.1280 at present, he said. "By the end of 2022, however, we forecast USD/RUB to rise to around 76.0 as markets begin to prepare for Fed rate hikes."

Bonds:

U.S. government bond yields continued to ease lower in Asia trade, as investors digested the first of two days of congressional testimony from Jerome Powell.

"We read Powell's prepared remarks for congressional testimony as leaning against the possibility of an earlier tapering decision in September," said Krishna Guha of Evercore ISI. Still, "we do not see him as abandoning this hawkish option,'" Guha wrote in a note to clients.

Powell appeared to play down any direct link between the Fed's purchases of mortgage bonds and a spike in home prices. He said he views Treasury and mortgage-bond purchases as somewhat equivalent on easing financial conditions, and said that mortgage-bond buying isn't especially targeted at housing prices.

Powell's comments seemed to suggest that as part of a taper process he would treat Treasurys and mortgages equally, even as some of his colleagues have called for a pullback in mortgage buying in the face of a surging housing market.

Energy:

Oil prices extended losses in Asia, falling nearly 1%, having settled more than 2% lower on Wednesday, pressured by data showing a decline in U.S. gasoline demand and as traders weighed speculation that Saudi Arabia and the United Arab Emirates have made progress toward a compromise on production levels.

Rystad Energy said reduced demand at recently prevailing prices was another reason for Thursday's retreat. "The market, despite the recent bullish signals, started realizing there is some reluctance from the buy-side to support the current high price levels."

Recent data that showed a 3% decline in first-half crude imports for the world's top importer, China, was further signaling that oil was now getting too pricey for some buyers, Rystad said.

Metals:

Gold futures were flat, after they marked their highest finish in nearly a month on Wednesday, finding support on the back of a decline in the dollar and Treasury yields and Jerome Powell's reassurance the Fed would maintain its accommodative monetary policy.

Copper was 0.3% higher but further gains may be limited on a media report of possible fresh measures from China, said ANZ, with Premier Li Keqiang also reportedly warning the government should keep macro policy stable and refrain from flooding the economy with stimulus.

TODAY'S TOP HEADLINES

China's Economic Growth Slows in the Second Quarter

BEIJING-China's economic rebound slowed in the second quarter but continued to show unusual resilience more than a year after the country largely got control of the coronavirus within its borders.

China's factories delivered another stronger-than-expected quarter of output while its consumers beat lowered expectations, raising hopes that domestic spending might play a greater role in sustaining momentum in the coming months.

Powell Says Fed Still Expects Inflation to Ease

Federal Reserve Chairman Jerome Powell said the central bank wouldn't hesitate to raise interest rates to keep inflation under control but repeatedly emphasized he still expects price pressures to ease later this year.

Inflation "has been higher than we've expected and a little bit more persistent," Mr. Powell said in a semiannual report Wednesday to House lawmakers. His appearance came a day after the government reported the fastest monthly rise in consumer prices in 13 years, largely because of special factors including a semiconductor shortage that is reducing the supply of autos.

OPEC Reaches Compromise With U.A.E. Over Oil Production

OPEC members reached a compromise with the United Arab Emirates, agreeing to lift the amount of oil that country can eventually pump as part of a wider agreement with Russia-led producers to boost global supplies, according to people familiar with the matter.

The compromise, reached between Saudi Arabia, the de facto leader of the Organization of the Petroleum Exporting Countries, and the U.A.E. is provisional and subject to approval at an as-yet unscheduled meeting of the cartel and a wider group, called OPEC+, that includes Russia-led producers.

NortonLifeLock in Talks to Buy Avast

NortonLifeLock Inc. is in talks to buy cybersecurity firm Avast Plc in a deal that would expand the U.S. company's focus on consumer software.

Avast said late Wednesday that the two were in advanced discussions about a cash-and-stock deal after The Wall Street Journal reported on the talks earlier Wednesday.

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Expected Major Events for Thursday

06:00/UK: Jun UK monthly unemployment figures

07:00/SVK: May New orders in industry

07:00/HUN: May Construction

08:00/POL: May Merchandise trade

08:00/POL: Jun CPI

08:00/ITA: Jun CPI

08:30/UK: 2Q Bank of England Credit Conditions Survey

08:30/UK: 2Q Bank of England's Bank Liabilities Survey

10:00/IRL: May Goods Exports and Imports

10:00/UK: Jul CBI Annual Education & Skills Survey

15:59/UKR: May Trade

16:59/AUT: Jul OPEC Monthly Oil Market Report

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07-15-21 0029ET