Stocks fall ahead of US inflation data, earnings hurdles

People walk past an electronic screen displaying Japan’s Nikkei stock price index inside a conference room in Tokyo, Japan, June 14, 2022. REUTERS/Issei Kato

SYDNEY/LONDON, July 11 (Reuters) – Stocks fell on Monday as investors braced for a U.S. inflation report that could force another huge hike in interest rates and the start of an earnings season in which earnings will be under pressure.

The STOXX index of European stocks fell 1.3% (.STOXX)with S&P 500 futures down 0.8% and Nasdaq futures down 0.9% as an upbeat report on US payrolls in June raised expectations for a 75 basis point rise by part of the Federal Reserve.

MSCI’s broadest index of Asia-Pacific stocks outside of Japan (.MIAPJ0000PUS) fell 1.8%, while Chinese blue chips (.CSI300) lost 1.9% after Shanghai discovered a COVID-19 case linked to a new subvariant, Omicron BA.5.2.1. read more

Bond yields and the unbridled US dollar also surged, the latter hitting a 24-year high against the yen.

Underscoring the global nature of the inflation challenge, the Canadian and New Zealand central banks are expected to tighten policy further this week.

While Wall Street made some gains last week, the market mood will be tested by earnings from JPMorgan and Morgan Stanley on Thursday, with Citigroup and Wells Fargo the following day.

Another headwind will be Wednesday’s US consumer price report, in which markets see headline inflation accelerating further to 8.8%, but a slight slowdown in the core measure to 5. 8%.

An early reading on consumer inflation expectations this week will also have the Fed’s attention.

“It will take an unexpected weakness in these releases to remove expectations of a 75bps Fed rate hike on July 27, which rose from about 71bps to 74bps after the payrolls report,” said Ray Attrill, NAB’s chief currency strategist.

PARTY OF PARITY

Treasury yields were up about 10 basis points on the jobs report and the 10-year bond was at 3.09% on Monday, up from a recent low of 2.746%.

A hawkish Fed combined with recession fears, particularly in Europe, has kept the dollar at 20-year highs against a basket of competitors. The dollar broke above 137.00 to hit its highest level since 1998 at 137.28 yen as the Bank of Japan remained dovish. read more

Japan’s conservative coalition government is expected to have increased its majority in Sunday’s upper house elections, two days after the assassination of former Prime Minister Shinzo Abe. read more

The euro continued to struggle at $1.0122, having lost 2.4% last week to hit a two-decade low and a major retracement target at $1.0072.

“With little economic relief on the horizon for Europe, and US inflation data likely to mark a new high for the year and keep the Fed hiking aggressively, we believe risks remain skewed in favor of the dollar,” he said. Jonas Goltermann, a senior markets economist at Capital Economics.

“In fact, we believe that the EUR/USD exchange rate will break parity before too long, and it is possible that it will trade somewhat through that level.”

Rising interest rates and a strong dollar have been a headache for underperforming gold, which was sitting at $1,739 an ounce after falling for four weeks in a row.

Oil prices also lost around 4% last week as demand concerns offset supply constraints.

China data due out on Friday is likely to confirm that the world’s second-largest economy shrank sharply in the second quarter amid coronavirus lockdowns.

Brent crude was trading down $1.27 at $105.76, while US crude fell $1.43 at $103.36 a barrel.

Reporting by Wayne Cole and Lawrence White; Edited by Kenneth Maxwell, Bradley Perrett, and Kirsten Donovan

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