U.S. inflation data, ECB meeting on the agenda

LONDON — European markets were mostly lower on Wednesday as investors digested a key inflation print from the U.S. and looked ahead to Thursday’s European Central Bank meeting.

The pan-European Stoxx 600 slipped 0.3% by late morning, with retail and travel stocks each shedding 2.1% while oil and gas gained 1.3%.

In terms of individual share price movement, Britain’s largest retailer Tesco fell 3.7% after warning of a fall in full-year profit for 2022 caused by tough U.K. economic conditions.

U.K. inflation came in at an annual 7% in March, its highest since for 30 years, driven by soaring food and energy prices.

Consumer prices rose by 1.1% month-on-month, outstripping expectations for a 0.7% climb in a Reuters poll of economists, which had projected a 6.7% annual increase.

Tineke Frikkee, head of U.K. equity research at Waverton Investment Management, told CNBC on Wednesday that retailers will struggle to pass on the current level of inflation to consumers and will likely follow suit in accepting a shrinkage of profits.

“Tesco has higher margins than, say, Sainsbury’s, so it will be very interesting to see. They have to follow Tesco or lose share. Tesco is determined to offer value to their customers and to keep at least at the same level as the likes of Aldi and Lidl that have actually been doing quite well in this tough environment,” Frikkee said.

Swedish real estate company SBB fell more than 8% to the bottom of the European blue chip index, while German potash and salt miner K+S jumped 6.8% after hiking its profit forecast on higher potash prices.

Fresh data on Tuesday showed U.S. consumer prices rose by 8.5% in March from the previous year — the highest level since 1981 — further fueling concerns of tighter monetary policy from the Federal Reserve. Core CPI rose 0.3%, slightly below expectations.

U.S. stock futures advanced in early premarket trading, with traders hoping that March may have shown a peak in inflation, after major indexes gave up an early rally to close in the red on Tuesday.

Shares in Asia-Pacific were mostly higher on Wednesday after Chinese exports rose more than expected in March, while New Zealand also hiked its main interest rate rate by 50 basis points, its biggest increase in more than 20 years.

“Our base case is that ECB policy will remain unchanged at this week’s meeting, with details on the end to quantitative easing (QE) being unveiled at the July meeting.”

Gurpreet Gill

Macro Strategist, Goldman Sachs Asset Management

Back in Europe, market focus is attuned to the ECB’s monetary policy decision on Thursday, as the Governing Council balances slowing growth and record-high inflation, increasing the risk of stagflation.

“Our base case is that ECB policy will remain unchanged at this week’s meeting, with details on the end to quantitative easing (QE) being unveiled at the July meeting,” said Gurpreet Gill, macro strategist for fixed income at Goldman Sachs Asset Management.

“An end to the Asset Purchase Programme has already been signalled for the third quarter, so the focus on Thursday will be on any changes to that timeline – a sooner conclusion to QE would open the door to earlier rate hikes.”

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The World Trade Organization on Tuesday slashed its forecast for global trade growth this year to 3% from 4.7% because of the “double-whammy” caused by the Russia-Ukraine war and Covid-19, and warned that soaring prices could facilitate a food crisis.

U.K. intelligence has suggested that Russian forces are readying a large and more focused push to expand control of eastern Ukraine, while the British foreign secretary said on Tuesday that the government is working to verify details of an alleged chemical weapons attack in the Ukrainian city of Mariupol.

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