MARKET WRAPS

Stocks:

European stocks struggled for momentum on Friday as investors digested the latest eurozone inflation data.

The core inflation print hit a record of 5.7% in March, a setback for central bankers whose rapid interest-rate rises have exacerbated financial sector strains and caused pains in part of the bloc's economy.

The fresh data increases the likelihood the European Central Bank will raise its key rate again in May. It could also encourage other policy makers to explore alternative ways to cool prices rises, by targeting excessive profiteering by companies or inflationary wage increases.

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Ahead

The Federal Reserve's preferred measure of inflation, the PCE price index, is due for release alongside the latest numbers on consumer spending and personal income later on Friday.

"Given the calmer waters around the global banking system, investors will take on today's PCE data in a much better frame of mind," SPI Asset Management said.

Swissquote Bank said "core inflation may have eased on a monthly basis but is expected to remain steady on a yearly basis around the 4.7% mark."

"A read in line with expectations, or ideally lower than expected could keep the Fed hawks at bay, and let the dollar further relax," it added.

Stocks to Watch

Europe's airlines look set to rake in more profit this year than previously estimated, Deutsche Bank said, raising their ratings on Franco-Dutch group Air France-KLM and Germany's Lufthansa to buy from hold.

Deutsche raised its operating-profit forecasts for the two carrier groups by some 20%, noting a likely quicker recovery than had been envisaged.

The first quarter may still be loss-making for airlines, and the market may still be wary of the effects of economic downturn on consumer demand, but higher earnings for the year, coupled with lower debt burdens, could boost the groups' share prices in coming months, it said.

Deutsche lifted its target price on AF-KLM to EUR2.30 from EUR1.75, and on Lufthansa to EUR14.50 from EUR10.50.

U.S. Markets:

Stock futures edged higher in early trading ahead of the PCE data.

Stocks to Watch

Rumble was rising 14.3% and Digital World Acquisition jumped 11.3% in premarket trading. Shares of the right-wing social media platforms rose following the indictment of Donald Trump.

Tesla is expected to release deliveries numbers for the first quarter over the weekend. According to 10 estimates compiled by FactSet, Wall Street expects the electric-vehicle company to have delivered 432,000 units in the first quarter, up from about 405,000 in the fourth quarter of 2022.

Virgin Orbit Holdings was falling 48.6% in premarket trading to about 17 cents after the space launch startup said it would cut 85% of its workforce.

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Forex:

The euro remained weaker against the dollar after the latest eurozone inflation data.

"The European Central Bank has repeatedly emphasized that it is currently focusing primarily on the core inflation rate," Commerzbank said. "In this respect, the ECB is still under pressure to raise key rates further."

UniCredit Research said earlier the euro could rise if eurozone inflation data showed underlying price pressures remained elevated in March, particularly after German inflation data eased by less than expected.

That, combined with a potential mix of sluggish personal income and spending data along with steady personal consumption expenditures price index figures, could help EUR/USD end the week on "quite a firm footing, " UniCredit added.

"EUR/USD has the potential to definitively break above the past peak of 1.0930 and then re-approach the year-to-date high of 1.1033."

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Sterling is set to be the best performing currency of the first quarter, boosted by an improved economic outlook and expectations the BOE will continue to raise interest rates further despite recent financial turmoil, ING said.

BOE Governor Andrew Bailey on Monday largely endorsed market pricing, although it's unlikely that upcoming economic data will underpin the need for additional rate rises, ING said.

"This morning's revision of fourth-quarter GDP data on the strong side is probably too outdated to have a material impact in this sense."

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The dollar edged higher after earlier losses as investors await the release of February's PCE data.

"Barring a major upside surprise, we don't expect a material impact on the dollar from PCE data today," ING said.

As evidenced recently, higher chances of the Fed lifting rates in May don't automatically translate into a stronger dollar in the current market environment, it said.

The dollar may stabilize after a week of losses but the short-term bias remains negative for the currency, ING added.

Bonds:

Investors of eurozone government-bond spreads have been unfazed by recent banking sector woes and higher rates volatility, Societe Generale said.

"A regime of low spread [volatility] is being fed by a 'buy the dip' mentality," it said.

That said, it sees clouds on the horizon, such as a deterioration in risk assets as the end of the interest-rate hiking cycle is approaching.

SocGen added that with the ECB prudently approaching the end of its hiking cycle, it expects spreads to remain rangy.

Additionally, SocGen said the focus for investors in Eurozone government bonds now turns to fundamentals which show no imminent risk of a crisis but remain gloomy.

This outlook could favor smaller eurozone government bond markets versus bigger ones, enabling them to outperform.

"The rising interest costs particularly for Italy will linger and restrain any large-scale spread narrowing," the French bank said.

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In anticipation of an end to the recent interest-rate rises, broker positioning monitors indicate that investors have moved toward a more defensive stance and started to add duration and steepeners to portfolios, J.P.Morgan Asset Management said.

While investors are searching for indicators that the acute phase of stress has cooled down, volatility remains high, JPMorgan AM said.

"With the market still making up its mind on what's to come, we think that volatility is here to stay," JPMorgan AM added, positioning for a recession, and making use of backups in yields to add duration to portfolios.

The MOVE index, which reflects rate volatility, is currently at levels only seen in 2020 and not far from levels experienced in the global financial crisis in 2008, the asset manager said.

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The 10-year Italian BTP-German Bund spread continued to trade in the 180-190 basis point range, but the market might underestimate political risks in Italy, Natixis said.

The spread has been almost unaffected by the risk-off environment and the higher volatility in the rates market in March, it said.

"However, we think the market has ignored the latest political news in Italy which suggests some political uncertainties may come to the fore in the coming days."

It points to news about growing concerns over the government's capacity to implement the EU-funded plan of reforms and investments, and the new code of public procurement.

Energy:

Oil prices ticked lower ahead of the PCE data, which is expected to show price pressures eased month on month but remained steady on year.

A stronger-than-expected reading could raise concerns the Fed will need to keep monetary policy tighter for longer.

Metals:

Base metals were mixed with gold slightly firmer, with markets having taken a breather this week following price whipsaws for much of the month triggered by banking turmoil.

Peak Trading Research said Friday's PCE outcome "will provide clues as to whether the Fed can pause [rate hikes] in May."

Copper

Low inventories of copper in LME warehouses and growing demand from China are likely to boost prices this year, Fitch said, lifting its annual price forecast for 2023 to $9,000 a metric ton from $8,500.

Rising demand from China as the country emerges from Covid-19 lockdowns and a weaker dollar are likely to act as tailwinds for copper, Fitch said. This, added to the fact that LME warehouse inventories are sitting at multi-year lows, means prices should remain elevated.

That said, countries slipping into recession and jitters around banking are likely to cap prices, Fitch said.

DOW JONES NEWSPLUS


EMEA HEADLINES

Eurozone Core Inflation Hits Record High

Core inflation in the eurozone hit a record in March, a setback for central bankers whose rapid interest-rate rises have exacerbated financial sector strains and caused pains in part of the bloc's economy.

The fresh data increases the likelihood that the European Central Bank will raise its key rate again in May. It could also encourage other policy makers to explore alternative ways to cool prices rises, by targeting excessive profiteering by companies or inflationary wage increases.


UK Economy Expanded More Than First Anticipated in Fourth Quarter

The U.K. economy expanded slightly in the fourth quarter, a stronger performance than previously anticipated, though it remains smaller than its size before the pandemic as elevated inflation and high interest rates hit economic activity.

Gross domestic product grew 0.1% from October to December compared with the previous three-month period, in comparison with the stagnation previously estimated in February, according to data from the Office for National Statistics released Friday.


French Inflation Eased in March on Slowing Energy Prices

French inflation took a dip in March, reaching its lowest level in six months, as energy prices decelerated markedly compared with a year earlier.

The consumer price index rose 5.6% in March on year measured by national standards, slowing from February's 6.3% increase, the lowest level since September, according to preliminary data from the country's statistics office Insee released Friday.


German Retail Sales Slumped More Than Expected in February

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03-31-23 0624ET