EUROPEAN EQUITY OPEN: Equities open higher; UCG IM buys stake in CBK GY; ADNOC to acquire COV1 GY for EUR 14.4bln; ITX SM posts decent results; key US CPI data due later

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  EUROPEAN OPEN: Equity indices are opening with gains on Wednesday, ahead of key US inflation data that will help shape the narrative on whether the Fed will kick-off its rate cutting cycle with a 25bps cut, or a larger 50bps move (see below for our preview). In data, the UK GDP estimate for July printed 0.0% M/M (exp. 0.2%, prev. 0.0%), and 1.2% Y/Y (exp. 1.4%, prev. 0.7%); the 3M/3M measure eased to 0.5% in July (exp. 0.6%, prev. 0.6%), while the services measure rose to 1.7% Y/Y (exp. 1.8%, prev. 1.2%). Capital Economics said the stagnation in July is unlikely to mark the start of a renewed downturn, and is sticking to its view that the BoE will keep interest rates unchanged in September, before cutting rates again in November; that said, CapEco concedes that the GDP data has made an interest rate cut next week a bit more likely.


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  STOCK SPECIFICS: In M&A and deals, Abu Dhabi National Oil Company is expected to acquire German chemicals firm Covestro AG (COV1 GY) for around EUR 14.4bln including debt, FT reports. UniCredit (UCG IM) acquired a 4.5% stake in Commerzbank (CBK GY) from the German government for EUR 702mln, paying around EUR 13.20/shr vs last close 12.60/shr, becoming the third-largest shareholder, reportedly holding 9% after the latest purchase. Rightmove (RMV LN) confirmed it received a unsolicited proposal from REA Group, which the board unanimously rejected since it undervalues the company. In earnings, the world's biggest listed fashion retailer Inditex (ITX SM) reported an 11% sales increase for its autumn-winter collections, offsetting earlier slowdown. In autos, Volkswagen (VOW3 GY) told workers on Tuesday it is ending a three-decade job security pact at its German plant. In healthcare, Novo Nordisk's (NOVOB DC) experimental obesity pill reportedly has mild-to-moderate side effects, according to Reuters citing an early trial, showing 13.1% weight loss in Phase 1 trial. In noable broker updates, JPMorgan put Getlink (GET FP) and Vinci (DG FP) on its Positive Catalyst watch, and added Sodexo (SW FP) to its Negative Catalyst watch list; it also upgraded Legrand (LR FP). Sandoz (SDZ SW) downgraded to Hold from Buy at Berenberg.

TODAY'S AGENDA:

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  DAY AHEAD: US CPI data for August is the highlight, and will help shape expectations on whether the Fed will begin its rate cutting cycle with a 25bps reduction, or a larger 50bps move (see below for our preview). Weekly MBA mortgage applications data are also due today. On the supply front, the US will sell USD 39bln of 10yr Notes; Germany will sell EUR 4.5bln of 2034 Bunds; UK will sell GBP 3.75bln of 2034 Gilts. In energy, API data was said to show headline crude stocks posting a surprise draw of -2.8mln (exp. +1.0mln), Cushing -2.6mln, Cushing -2.6mln, distillates saw a build of +0.2mln (exp. +0.3mln), and gasoline inventories drew down by more than expected at -0.5mln (exp. -0.1mln); the more widely followed DoE energy inventory report will be released at 10:30EDT/15:30BST.


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  PREVIEW - US CPI (13:30BST/08:30EDT): The consensus looks for US consumer prices to rise +0.2% M/M in August (prev. +0.2%), with the annual rate expected to ease to 2.6% Y/Y from 2.9%; the core rate of CPI is expected to also rise +0.2% M/M (prev. +0.2%), with the rate of annual core CPI expected to remain unchanged at 3.2% Y/Y.  Goldman Sachs said this month’s report is expected to show a continued rise in car insurance prices, though at a slower rate, while shelter inflation should moderate, with owners’ equivalent rent up by 0.33% and primary rent by 0.29%. Ahead, Goldman sees monthly core CPI inflation is at around 0.2% M/M for the rest of the year, with annual core CPI inflation forecasted at 2.9% Y/Y and core PCE inflation (the Fed’s preferred measure) at 2.6% Y/Y by December 2024. GS says disinflation is anticipated in the auto, housing rental, and labour markets, balanced by potential increases in healthcare and car insurance costs. August's labour market data itself did not offer any explicit clarity on whether the Fed would be more inclined to begin its rate cutting cycle with a 25bps reduction, or a larger 50bps move at its September 18th meeting. The headline came in beneath expectations at 142k (vs an expected 160k), though the jobless rate declined to 4.2% from 4.3%; that said, the underemployment rate rose to 7.9% from 7.8%, and average hourly earnings rose +0.4% M/M (exp. +0.3%), pushing the annual rate up to 3.8% Y/Y from 3.6%. Citi says Inflation data are quickly taking a backseat to labour market data in terms of relevance for Fed policy decisions, but with an inconclusive August employment report, the August CPI data could be impactful for the probability of a 25bps or 50bps rate cut. “A downside surprise to CPI could further raise market-implied probabilities for a 50bps cut in September, but a benign reading as we expect would have markets and Fed officials looking to activity data like initial jobless claims and retail sales for guidance on the appropriate size of the first cut,” the bank writes. Money markets are currently pricing around a 65% chance that the Fed will cut rates by 25bps in September, with around 35% probability of an upsized move. Through the end of the year, markets are pricing around 115bps of rate reductions (implying four fully priced 25bps rate reductions, with a decent chance of a fifth). JPMorgan says that the Bull Case is if we see a reading of 0.1% M/M or lower, which would push the Fed towards 50bps while growth holds up, though it warns that a cooler print like this may be seen as evidence that the economy is declining more rapidly than expected. JPM's Bear Case is an outlier print that sparks a recessionary or stagflationary narrative, which JPM says could mean a headline of less than 2% Y/Y or above 4% Y/Y. JPM writes that "given the fragility of the market, there is a Goldilocks level here where ideally we would see CPI print inline, or +/- 0.1% of consensus with earnings increasing." JPM says that lost in the analysis of the labour market is the fact consumers are still spending.

11 Sep 2024 - 08:10- Fixed IncomeData- Source: Newsquawk