By Lawrence Delevingne and Nell Mackenzie
Wall Street stocks and oil prices were muted on Monday, as investors digested Chinese data that heightened worries of an economic slowdown and looked ahead to a key U.S. inflation report.
The Dow Jones Industrial Average rose about 0.4%, while the S&P 500 and Nasdaq Composite were both little changed. The pan-European STOXX 600 index rose 0.13%.
Chinese consumer price figures fell in June, leaving them almost unchanged from a year earlier, while producer prices slid deeper into negative territory.
The weakness implies scope for further monetary policy easing but also underlines the challenge Beijing faces in reflating its economy and avoiding a deflationary spiral.
“China is just a symptom. We see weaker growth around the world because of the effect of higher interest rates. China is exposed to that because of their export sensitivity,” said Matthias Scheiber, global head of multi-asset portfolio management at Allspring Global Investments in London.
“The challenge going forward will be on equity valuations. If there is no improvement in earnings, it will be hard for equities to continue to rally,” added Scheiber.
Citigroup on Monday downgraded U.S. stocks in anticipation of a pullback in growth equities and a recession in the fourth quarter of the year, while betting on beaten-down counterparts in Europe with an upgrade.
The brokerage cut its rating on U.S. stocks to “neutral” from “overweight” after a strong rally in the first half of the year. It warned that growth stocks were set for a pullback as the “euphoria” around artificial intelligence enters a more “digestive” phase.
The earnings season starts this week with JPMorgan, Citi, Wells Fargo, State Street and PepsiCo among those reporting.
U.S. consumer prices are expected on Wednesday to show headline inflation slowed to its lowest since early 2021 at 3.1%, down from 9.1% a year earlier.
Separately, U.S. wholesale inventories were unchanged in May after declining for two straight months, suggesting inventory investment could support economic growth in the second quarter.
“Markets are coming around to our view that central banks will be forced to keep policy tight to curb inflationary pressures,” BlackRock Investment Institute strategists wrote in a note Monday. “Stubbornly high U.S. CPI inflation data this week could bolster the recent bond yield surge as markets expect the Fed to hike rates.”
Markets still think the Federal Reserve is likely to hike rates this month, but a weak CPI might lessen the risk of a further move in September.
Currently, futures imply around a 90% probability of a rise to 5.25%-5.5% this month, up 25 basis points.
Fed officials have been mostly hawkish in their communications, including Loretta Mester, who said on Monday that still-strong levels of underlying inflation pressures are pointing the central bank toward more rate rises.
Markets have also priced in higher rates in Europe and the UK. Canada’s central bank meets this week and markets imply a 69% chance of another hike.
The risk of higher global rates for longer has caused havoc in bond markets, where U.S. 10-year yields jumped 23 basis points last week, German yields 24 basis points and UK yields 26 basis points. The yield on 10-year U.S. notes fell 3 basis points on Monday to 4.018%.
U.S. two-year yields last stood at 4.889%, having hit a 16-year high of 5.12% last week.
The dollar sank to a three-week low against the yen on Monday as investors continued to price in expectations that the Federal Reserve is near the end of its tightening cycle.
The dollar dipped 0.15%, while the euro was up 0.16%, and the pound fell 0.12%.
In commodity markets, gold added 0.17% after making a slight gain last week.
Oil prices dipped on Monday after weak economic data from top consumers the U.S. and China, although expected crude supply cuts from Saudi Arabia and Russia limited losses.
U.S. crude fell 0.28% to $73.65 per barrel and Brent was at $78.33, down 0.18% on the day. (Reuters)