MARKET WRAPS

Watch For:

EU Long term interest rates statistics; UK Index of Production, Trade, Index of Services, Monthly GDP Estimates, Business Finance Review, NIESR Monthly GDP Tracker; Italy Labour Cost Index; OECD Composite Leading Indicators; no major corporate updates expected

Opening Call:

European shares face further steep losses as investors price a more aggressive Fed tightening path. In Asia, stocks tumbled, the dollar and Treasury yields added to gains while commodities weakened across the board.

Equities:

European and U.S. stock futures sold off Monday as investors remained nervous following the hotter-than-expected U.S. inflation print and ahead of this week's Federal Reserve meeting

Fed policy-makers are expected to raise interest rates by 50 basis points this, though some economists think that after Friday's data, there may be support for a more aggressive 75-basis-point hike.

Read: 'Doves Don't Exist on the FOMC Right Now': Economists Expect Hawkish Fed Meeting This Week

"U.S. CPI for May was a nightmare for risk markets," wrote Stephen Innes, managing partner at SPI Asset Management. "The market is now thinking much more about the Fed driving rates sharply higher to get on top of inflation and then having to cut back as growth drops."

That will leave traders and investors "deliberating how much further tightening central banks' will be able to deliver and, therefore, how much higher yields can go from here. And we all know nothing ever good happens when interest rate volatility spikes in capital markets," he said.

Forex:

The dollar strengthened further against a basket of major currencies on heightened fears over the Fed's tightening path.

In Asian trading, the greenback climbed 0.4% to 134.89 yen after earlier touching Y134.99, the highest intraday level since October 1, 1988.

Read: Yen Takes Beating in Global Market Rout

Karl Schamotta at Corpay said Friday that consumer prices rising by more than expected in May has lifted the odds on a 50 basis-point increase at the Fed's September meeting...He noted that a 50 bp increase was already widely expected for June and July but now the market prices a similar sized move in September at nearly 100%.

"The federal funds rate is now seen hitting 3 percent by year end, tilting interest differentials further in the greenback's favor."

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Sterling could fall as the Bank of England is unlikely to deliver on the market's interest rate rise expectations, said Unicredit Research. "Markets continue to price in an aggressive tightening by the BOE, despite signs of deterioration already emerging in the U.K. economy."

The BOE will probably lift its key rate 25 basis points to 1.25% Thursday followed by a hike to 1.50% in August but will keep rates steady thereafter, whereas the market expects at least four more 25bp rises after June, said forex strategist Roberto Mialich.

Unicredit expects GBP/USD to fall below 1.20 and EUR/GBP to rise above 0.95 over the medium-term.

Bonds:

Treasury yields continued to rise in Asia after yields on 2- and 10-year notes hit their highest levels in years Friday, while part of the curve inverted, following the U.S. inflation data.

"Friday's inflation data suggests the 'peak inflation' debate may be premature," said Nancy Davis, founder of Quadratic Capital Management.

"Investors remain too confident that the Federal Reserve will be able to control inflation. We should not take the Fed's ability to control inflation as a given."

Energy:

Oil futures extended their recent retreat as recession concerns mount, sparked by the latest U.S. inflation print.

Expectations for more aggressive Fed policy tightening have hit fresh highs, driving recession fears to "multi-storey levels" and compounded by clouds forming again over China's reopening from its Covid-19 outbreak, said SPI's Stephen Innes.

Weakness for crude, however, was relatively subdued, said Edward Moya, senior market analyst for the Americas at OANDA.

"Some traders are entering de-risking mode as prospects for the economy continue to dim, but no one really wants to abandon the best trade of the year, which is oil and energy stocks," he said.

Metals:

Gold futures edged lower as the dollar continued to climb on the Fed's tightening path and growing economic risks. However, Phillip Securities said demand for safe haven assets like gold may be supported in the near term.

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Base metals weakened on the slump in risk appetite following the U.S. CPI data. ING said the market now expects not just more frontloading of the Fed's rate increases, but a higher peak as well.

Iron ore futures also fell sharply, although analysts said prices may be supported by hopes for stimulus measures from China.

The Chinese government is now looking to ramp up monetary and fiscal support, said Citi analysts, adding that the infrastructure construction pipeline still looks robust, although this is subject to Covid-19 lockdowns.


TODAY'S TOP HEADLINES

Earnings Are Under Threat, Another Blow to Sagging Stock Market

Stocks have fallen this year in the face of rising interest rates. With inflation showing little sign of cooling, many investors fear corporate earnings could be the market's next support to fall.

The S&P 500 has dropped 18% in 2022, its worst start to a year since 1962, as the Federal Reserve embarks on a rate-rising campaign to bring down four-decade-high inflation. The tightening of monetary policy has trampled on the rich valuations stocks carried at the start of the year, leaving earnings growth as a key pillar for the market to regain its footing.


Food Prices to Keep Going Up, as Costs Surge

Some of the nation's biggest food suppliers and restaurants, including Kraft Heinz Co. and some McDonald's Corp. franchisees, said they would continue to raise prices as they face starkly higher costs.

Kraft Heinz notified retailer customers this past Monday that it would raise prices in August on items ranging from Miracle Whip and Classico pasta sauce to Maxwell House coffee products and some deli meat.


Japan's Yen Usually Benefits When Markets Get Ugly. Not This Time

A surge of U.S. inflation is hammering the Japanese yen, a currency that typically strengthens on bad economic news.

The yen is approaching its weakest point since 2002, stuck between a strong U.S. dollar and Japan's easy-money policy. The dollar rose as the global economy's prospects dimmed, hurt by Russia's invasion of Ukraine, a jump in U.S. inflation and an economic slowdown in China. An index that measures the dollar against a basket of 16 currencies is up more than 12% over the past year. The dollar has advanced 22% against the yen during that time.


Pandemic, War in Ukraine Create New Challenges for Struggling WTO

WASHINGTON-Fallout from the Covid-19 pandemic and the war in Ukraine are creating new challenges for the World Trade Organization, which has struggled in recent years to play its role as the regulator and arbiter of global trade.

Trade ministers gathering in Geneva this week for the first meeting of top officials from WTO member countries since 2017 face a mountain of pressing issues, including increasing food security amid war-induced shortages and responding to the continuing pandemic, as well as resolving long-running issues such as depletion of global fishing stocks.


Gasoline Prices Reach $5 a Gallon Nationwide for the First Time

The average price of a gallon of regular unleaded gas in the U.S. hit $5 Friday night, and the rise in fuel costs is expected to persist throughout the busy summer driving season.

The record high, according to OPIS, an energy-data and analytics provider, comes as U.S. consumer inflation hit its highest level in 40 years and crude oil prices remain high.


Abandon Stocks for Bonds? If Only Life Were So Simple.

The good news: At last, there is a worthwhile alternative to stocks. Bonds sport far more attractive yields than they have in years.

The bad news: Benchmark U.S. Treasurys have been crushed this year alongside stocks. Both the 10-year bond and the S&P 500 were down an unlucky 13% for the year up to the middle of this week, although stocks were then hit much harder by Friday's bad inflation figures than bonds were. Meanwhile junk bonds, the highest-yielding corporate bonds, bring similar exposure to a potential worsening of corporate fundamentals as shares.


Macron's Majority in French Parliament at Risk in Neck-and-Neck Races

PARIS-President Emmanuel Macron was at risk of losing his majority in the National Assembly after projections based on early ballot counts of the first round of France's parliamentary elections Sunday showed his candidates running neck and neck with leftist rivals, complicating the French leader's efforts to press ahead with his pro-business agenda.

A projection by polling firm Harris Interactive estimated that Mr. Macron's candidates and those of far-left firebrand Jean-Luc Mélenchon each garnered 25% of the nationwide tally. Marine Le Pen's far-right National Rally won 19% of the first-round vote while the conservative Les Républicains and its allies garnered 11.5%, according to Harris Interactive.


Three-Dose Pfizer Covid Vaccine Works Safely in Young Children, Review Says

Three doses of the Covid-19 vaccine from Pfizer Inc. and BioNTech SE were effective at preventing symptomatic disease in children ages 6 months through 4 years in studies, according to U.S. health regulators.

The FDA staff also said, in a review of study data posted online Sunday, that there were no new safety concerns using the vaccine in young children compared with older age groups.


Write to paul.larkins@dowjones.com


Expected Major Events for Monday

06:00/NOR: Apr Monthly GDP

06:00/UK: Apr Index of Production

06:00/UK: Apr UK trade

06:00/UK: Apr Index of services

06:00/UK: Apr Monthly GDP estimates

07:00/TUR: Apr Industrial Production Index

(MORE TO FOLLOW) Dow Jones Newswires

06-13-22 0021ET