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Opening Call:

Caution will likely dominate European markets early Wednesday after Jerome Powell noted challenges ahead to avoid a U.S. recession. Stocks were mixed in Asia; the dollar, Treasury yields and oil gained; and gold weakened.


European shares may struggle for momentum Wednesday following another hawkish message from Jerome Powell and despite a tech-led rally on Wall Street.

U.S. stocks briefly pared gains as Powell voiced resolve in fighting inflation, before indexes climbed back toward new session highs.

"There could be some pain involved" in restoring price stability, Powell said in remarks at The Wall Street Journal's Future of Everything Festival.

Powell said he wasn't at odds with those who believe the Fed faces a difficult path toward achieving what is known as a "soft landing," in which growth slows enough to bring down inflation without triggering a recession.

"I would say there is no disagreement really. It is a challenging task, made more challenging the last couple months because of global events," he said. "It is challenging because unemployment is very low already and because inflation is very high."

Wells Fargo CEO Charlie Scharf, speaking at the same event, said it would be difficult to avoid a recession but noted that consumers and businesses remain financially solid.

"The fact that everyone is so strong going into this should hopefully provide a cushion such that whatever recession there is, if there is one, is short and not all that deep," he said.

Read more from Powell here.

Economic Insight:

European and U.S. consumers look set to tighten their belts in response to the rising cost of living, but prices may increase more than they think, according to a survey.

A JPMorgan poll of 5,000 French, German, Spanish, British and U.S. consumers found they expect to reduce non-essential spending by more than 6% this year, though most appear to be under-estimating inflation, JPM said.

Consumers plan fewer do-it-yourself projects than before the pandemic, potentially hitting home-improvement retailers, the survey found. Consumers also look set to prioritize leisure spending over buying jewellery/premium accessories and sports and beauty products. Still, online grocers and food-delivery firms could benefit as only 20% of respondents plan to visit supermarkets more, the report showed.


The dollar edged higher following Tuesday's pullback, as emerging risk aversion driven by losses in some Asian equity markets and U.S. stock futures boosted the currency's haven appeal.

Westpac said it was still far too early to call a long-term peak in the dollar and retracements should be shallow.

Jerome Powell reinforced the Fed's resolutely hawkish stance, although the European Central Bank was beginning to coalesce around a more hawkish posture, Westpac said.


The Fed's Charles Evans said Tuesday that aggressive central bank rate rises are needed to get inflation back under control.

"Inflation is clearly much too high and monetary policy must be repositioned to address this," Mr. Evans said in a speech in New York.

Read more here.


Treasury yields extended their gains in Asia after they rose to their highest levels in at least a week Tuesday.

U.S. data that included in-line retail sales and industrial activity that surprised on the upside helped lift yields Tuesday, and they remained elevated after Powell reinforced the Fed's commitment to stabilize price increases.

"Powell was open to moving rates past neutral if necessary and added that the landing could be a bit bumpy with an emphasis on balancing the labor market and restoring price stability," said BMO Capital Markets.

"Powell's comments only served to reinforce the Fed's current mantra of combating inflation at all costs," with the costs being economic performance.


Oil futures pushed higher in Asia on optimism over China fuel demand after Shanghai on Tuesday had a third straight day of no new Covid-19 infections outside quarantine zones.

The "less awful news on China offers a nip in the tail in the form of much higher oil demand and prices," said SPI Asset Management.

However, the lack of an EU ban on Russian oil could limit the topside until the special summit on May 30-31, which is the next opportunity to agree on such an embargo, SPI added.


While the near-term outlook for oil is strong, Macquarie expects prices to fade in the second half.

Brent crude has averaged $107 in the second quarter so far but a likely increase in supply from OPEC and other countries, potentially including Iran, should weigh on prices in the second half, Macquarie said.

"We maintain our long-term assumption of $65 but defer this to the first quarter of 2024 [from 1Q of 2023]," Macquarie said.


Gold futures weakened as contrary influences in the market continued to cause volatility.

Interest-rate differentials between the U.S. and some countries have narrowed, which has put downward pressure on the dollar and given the "green light" for gold investors to buy the dip, said OANDA.

However, bullion has pared recent gains partly because the U.S. retail sales data suggested the consumer remains strong, which is spurring expectations that the Fed won't ease up on its policy tightening.


Base metals were marginally lower on worries about China's economic slowdown.

Recent data suggested that China's stalling economy requires aggressive stimulus and a swift easing of Covid-19 restrictions, which don't appear likely soon, said TD Securities. In this context, base metals are expected to remain under selling pressure.


Iron-ore futures were down more than 2% on concerns over steel demand in China.

According to a media report, China Steel Corp. said this week that it will lower domestic steel prices by 2.1% on average for June delivery, partly due to a brief slowdown in steel demand.

Commodity-grade steel prices remain under pressure as international supply-side constraints continue to ease for basic steel products, said Rystad Energy.



Powell Says Fed Has Resolve to Bring U.S. Inflation Down

The Future of Everything Festival is happening right now. Click here to register and watch for free as a member.

Federal Reserve Chairman Jerome Powell said the central bank's resolve in combating the highest inflation in 40 years shouldn't be questioned, even if it requires pushing up unemployment.


Fed's Evans: Inflation Is Much Too High and Fed Must Act

Federal Reserve Bank of Chicago President Charles Evans said Tuesday that aggressive central bank rate rises are needed to get inflation back under control.

"Inflation is clearly much too high and monetary policy must be repositioned to address this," Mr. Evans said in a speech in New York.


U.S. Floats Tariff on Russian Oil as EU Oil-Sanction Talks Drag On

BRUSSELS-The U.S. is talking with the European Union about ways to limit global energy price increases that could be caused by an EU-proposed embargo on Russian oil, looking at additional options like setting a tariff on imports of Russian oil, according to U.S. Treasury officials.

Treasury Secretary Janet Yellen, who is in Brussels Tuesday ahead of a meeting of finance ministers of the Group of Seven major economies in Germany this week, has previously said that the proposed EU embargo on Russian oil could significantly raise oil prices globally.


Spain, Australia, U.K. Most Exposed to Financial Shock as Rates Rise, Says Fitch

SYDNEY-As central banks raise interest rates to combat the biggest inflation spike in decades, Fitch Ratings says Australia, Spain and the U.K. are the most exposed to a financial shock.

Australia and Spain's vulnerability stems from a high proportion of variable-rate mortgage lending, while borrowers in the U.K. already have relatively high debt-to-income ratios.


China's New-Home Prices Continued to Fall in April

BEIJING-New-home prices in China fell for the first time since late 2015 on a yearly basis as authorities' efforts to ease property-purchasing curbs and reverse the property market slump were yet to take effect.

Average new-home prices in 70 major cities edged 0.11% lower in April from a year earlier, reversing from March's 0.66% increase, according to Wall Street Journal calculations based on data released Wednesday by China's National Bureau of Statistics.


U.S. Economy Is Headed for a Downturn, Wells Fargo CEO Says

Wells Fargo & Co. CEO Charlie Scharf said Tuesday there was "no question" that the U.S. is headed for an economic downturn.

The Federal Reserve has raised rates twice this year and plans to keep doing so, part of its bid to cool the economy and curb red-hot inflation. Higher rates have pushed up borrowing costs for mortgages, credit cards and other loans. The Fed's moves have raised the question of whether the U.S. is headed toward a recession, which some investors fear could happen if the Fed raises rates too quickly.


U.K. Threatens to Tear Up Key Part of Brexit Deal Due to Northern Irish Tensions

LONDON-The British government Tuesday threatened to tear up an important part of its Brexit divorce deal with the European Union, saying it was causing political paralysis in Northern Ireland.

In a move that risks stoking a trade war with the EU, U.K. Foreign Secretary Liz Truss said Tuesday the government plans in the coming weeks to present a law allowing it to unilaterally alter the terms of a deal agreed in 2019 with its European counterparts that governs the movement of goods between Northern Ireland, which is part of the U.K., and the rest of the U.K.


Sweden, Finland to Lodge NATO Bid

Sweden and Finland plan to apply for NATO membership on Wednesday, according to their leaders, a move that would break with decades of nonalignment by the two Nordic countries and represent a major geopolitical shift in Europe in response to Russia's invasion of Ukraine.

At a joint press conference Tuesday, Swedish Prime Minister Magdalena Andersson and Finnish President Sauli Niinistö in Stockholm said the countries plan to jointly present their applications for membership in the U.S.-led alliance.


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Expected Major Events for Wednesday

06:00/SWE: 1Q Industrial inventories

06:00/EU: Apr New Passenger Car Registrations in Europe statistics (EU27 + EFTA3)

06:00/UK: Apr UK producer prices

06:00/UK: Apr UK monthly inflation figures

07:00/SVK: Apr Harmonized CPI

07:00/AUT: Apr CPI

08:30/UK: Feb Card Spending statistics

08:30/UK: Mar UK House Price Index

09:00/CYP: Apr Harmonised CPI

09:00/MLT: Apr Harmonised CPI

09:00/EU: Apr Harmonised CPI

09:00/GRE: Mar Labour Force Survey

10:00/POR: Apr PPI

17:59/POR: Mar Balance of Payments

23:01/UK: 3Q Manpower UK Employment Outlook Survey

All times in GMT. Powered by Kantar Media and Dow Jones.

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This article is a text version of a Wall Street Journal newsletter published earlier today.


(END) Dow Jones Newswires

May 18, 2022 00:25 ET (04:25 GMT)

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