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Before the Bell: U.S. futures fall sharply after faster-than-expected rise in inflation, TSX futures lower

Equity Markets

U.S. stock futures turned sharply lower Wednesday, pointing to a triple-digit loss at the open, after data showed inflation rose in January more than expected.

The Toronto stock market was under pressure again Wednesday as oil prices fell pressured by rising U.S. crude production.

U.S. consumer prices rose more than expected in January, with a measure of underlying inflation posting its biggest gain in a year, strengthening expectations that price pressures will accelerate this year and prompt a faster pace of interest rate increases from the Federal Reserve.

The Labor Department said its Consumer Price Index increased 0.5 per cent last month as households paid more for gasoline, rental accommodation and healthcare. The CPI rose 0.2 per cent in December. The year-on-year increase in the CPI was unchanged at 2.1 per cent as the large price gains from last year dropped out of the calculation.

Excluding the volatile food and energy components, the CPI shot up 0.3 per cent. That was the largest increase since January, 2017, and followed a 0.2-per-cent rise in December. The year-on-year rise in the core CPI was unchanged at 1.8 per cent in January, also because of less favourable base effects.

Economists polled by Reuters had forecast the CPI increasing 0.3 per cent in January and the core CPI rising 0.2 per cent.

Inflation concerns sparked a sell-off on Wall Street in premarket trading and boosted benchmark U.S. Treasury yields to a four-year high.

The CPI data was "Stronger than expected, a little hot. It sort of feeds on investor fears of an economy running a little hot, that interest rates could rise and put pressure on equities," Jack Ablin, chief investment officer at Cresset Wealth in Chicago.

"It's feeding that fear that the labour market started about 10 days ago," Mr. Ablin said, referring to a strong January jobs report on Feb. 2, which was a trigger for last week's sell-off.

Inflation data has taken on particular significance following recent strong wage growth data that prompted investors to ratchet up expectations for U.S. rate hikes this year and sparked a rout in world stock markets.

"This renewed focus on inflation, not only in the U.S. but more globally has raised concerns that central banks may well be behind the curve when it comes to assessing the outlook for the next few months," said Michael Hewson, chief market analyst at CMC Markets UK.

On Tuesday, Wall Street climbed for a third straight session, buoyed by Amazon.com and Apple. However, Canada's main stock index fell modestly, pausing after racking up a hefty gain in the previous session, as industrial and energy shares fell along with the price of oil.

Several stocks could see reaction Wednesday. Teck Resources reported a fourth-quarter profit of $760-million, boosted by the reversal of an impairment charge related to an improvement in the outlook for steel-making coal prices. But its U.S.-listed shares fell 3.5 per cent in premarket trading.

Media company Torstar announced Tuesday it is cutting jobs and internships as its fights a steep decline in advertising revenue.

In the U.S., restaurant chain Chipotle Mexican Grill shares were up 12 per cent in premarket trading following news late Tuesday that the company is tapping Taco Bell CEO Brian Niccol as its new CEO.

Credit Suisse posted its third consecutive annual loss on Wednesday, highlighting writedowns in the fourth quarter of 2017 due to the overhaul of the U.S. tax system. Its shares were up 3 per cent in premarket trading.

In Europe, the pan-European STOXX 600 index was up 0.6 per cent with most bourses and sectors in positive territory as a strong set of corporate results and robust economic growth in Germany lifted shares.

Upbeat earnings from Coca-Cola HBC and gains among financials boosted Britain's top share index on Wednesday, though trading was cautious ahead of the U.S. inflation report. Britain's blue chip FTSE 100 index was up 0.78 per cent, Germany's DAX was up 0.74 per cent and France's CAC was up 0.85 per cent.

Asian shares were mixed and Japan's benchmark Nikkei closed down 0.4 per cent as the yen rose and with investor sentiment generally strained ahead of the U.S. January inflation report. China's Shanghai index was up 0.46 per cent and Hong Kong's Hang Seng rose 2.27 per cent.

Commodities

Oil prices were lower but stable on Wednesday, supported by a statement that Saudi crude output would drop in March, healthy economic growth and on a weakening U.S. dollar.

Despite this, oil prices remain well below recent highs due to signs of lingering oversupply, including rising U.S. inventories and ample physical flows globally.

The Saudi energy ministry said on Wednesday that Saudi Aramco's crude output in March will be 100,000 barrels per day (bpd) below its February level while exports would be kept below 7 million bpd.

Ongoing weakness in the U.S. dollar as well as economic growth were also supporting oil markets, traders said.

Despite this, some analysts warned that not all indicators were bullish.

"While we continue to see a firming fundamental backdrop over the course of this year...investors should not discount the caution signs that have been emerging," investment bank RBC Capital Markets said in a note to clients.

"Pockets of oversupply have been emerging in the physical market," the Canadian bank said. "The tempering physical oil backdrop is ... playing a central role in the recent price softness," it said.

The American Petroleum Institute said on Tuesday that U.S. crude inventories rose by 3.9 million barrels in the week to Feb. 9, to 422.4 million.

Gold rose for a third day on Wednesday, pulling further away from last week's one-month low as the dollar wilted ahead of U.S. inflation data.

The U.S. inflation report for January could raise expectations for faster U.S. interest rate hikes if it indicates price pressures are building.

"U.S. monetary policy is still the main driver for the yellow metal," ActivTrades' chief analyst Carlo Alberto De Casa said. "Any jump in U.S. inflation could generate selling on gold, as investors will probably see further raises on the horizon."

While inflation can boost demand for bullion as a safe store of value, the positive impact of that may be offset by a rise in interest rates, which makes non-yielding gold less attractive.

Among other precious metals, silver was up 0.1 per cent at US$16.57 an ounce, while palladium was flat at US$985 an ounce. Platinum was up 0.1 per cent at US$974.50.

Currencies and bonds

The Canadian dollar fell slighlty after the U.S. inflation data was released, and remained just below the 80-US-cent level.

In addition to inflation data from the U.S., January's Teranet Home Price Index could have an impact on the dollar, said Elsa Lignos, global head of FX Strategy at RBC Capital Markets.

"While USD/CAD continues to hover around 1.2600 as broad-based USD weakness is offset by CAD weakness on the major crosses, we continue to stress that prices will have to close above resistance at 1.2663 in order to sustain the current correction. Support is located at 1.2518," she wrote in a note.

Unease about the looming inflation data was perhaps greatest in currency markets, where the U.S. dollar slid to a 15-month low against the Japanese currency at around 106.82 yen.

The dollar, measured against a basket of currencies, dipped to a one-week low and was last down 0.1 per cent at 85.62.

The dollar index has now given up two-thirds of the gains it notched up this month when investors rushed into the greenback as equity markets suffered a violent sell-off.

"My read is the dollar has not benefited in line with previous corrections of this magnitude. The dollar move also reflects the fact this has not yet become a correction where markets and investors are worried about the macro backdrop," said Kamakshya Trivedi co-head of global FX and EM strategy at Goldman Sachs. "[Today's] CPI will be key to see if the correction extends further or if we are near the end of it."

U.S. long-dated Treasury yields slipped on Tuesday in quiet, range-bound trading, as investors looked to Wednesday's U.S. inflation report that could shed more light on the pace of future interest rate increases by the Federal Reserve.

U.S. 10-year yields, which move inversely to prices, have risen about 43 basis points so far this year. U.S. 30-year yields are on a similar path, climbing 39 basis points in 2018.

U.S. 10-year yield were lower at 2.8349 per cent while the 30-year Treasury was lower at 3.1176 per cent.

The Canada 10-year bond was slightly lower at 2.32 per cent.

Stocks set to see action

Canopy Growth Corp., Canada's biggest marijuana producer, said on Wednesday its third-quarter revenue doubled and profit rose, even as analysts expected a loss. Net profit rose to $11-million from $3-million a year earlier. Analysts, on average, looked for a loss of $7.1-million. The earnings included a one-time gain of $8.8-million from the sale of Canopy's Agripharm business. Earnings per share fell to 1 cent from 3 cents as the number of outstanding shares rose. Excluding the one-time gain, the company had a loss of 2 cents, compared with expectations for a loss of 5 cents, according to Thomson Reuters I/B/E/S.

Six companies announced they have signed letters of intent with Quebec's liquor board to supply cannabis and related products including Quebec-based The Hydropothecary Corp., Aphria Inc., Canopy Growth Corp., MedReleaf Corp., Tilray, and Aurora Cannabis Inc..

Teck Resources Ltd. reported a fourth-quarter profit of $760-million, boosted by the reversal of an impairment charge related to an improvement in the outlook for steelmaking coal prices. The miner says the profit amounted to $1.32 per share for the three months ended Dec. 31 compared with a profit of $697-million or $1.21 per share a year earlier. Its shares on the NYSE were down 0.5 per cent in premarket trading.

Credit Suisse said Wednesday that it narrowed its fourth-quarter loss and predicted a positive impact from the U.S. tax reform in the future after an initial financial hit. The Zurich-based bank, which has been undergoing a three-year restructuring under CEO Tidjane Thiam, says its net loss during the quarter shrank to 2.13 billion Swiss francs ($2.28 billion) from 2.62 billion francs a year earlier. Its U.S.-listed shares were up 2.66 per cent in premarket trading.

Fossil Group jumped nearly 80 per cent after the watch and accessories retailer reported better-than expected quarterly results.

Chinese internet search firm Baidu gained 6.3 per cent after reporting upbeat quarterly revenue and the company unveiled a U.S. listing plan for its Netflix-like video platform iQiyi.

Hotel operator Hilton Worldwide Holdings Inc. reported a 24-per-cent rise in quarterly revenue on Wednesday, as more people booked its rooms at higher prices. Its profit came in at 54 cents per share, 9 cents a share above estimates. Its shares were up 2.1 per cent in premarket trading.

Brewer Molson Coors reported quarterly profit of 62 cents per share, 6 cents above estimates and revenue was in line with expectations. Its shares rose 2.7 per cent in premarket trading.

Earnings are expected Wednesday from these companies: Agilent Technologies Inc.; Agnico Eagle Mines Ltd.; Aimia Inc.; Allied Properties REIT; Applied Materials Inc.; Boston Pizza Royalties Income Fund; Canadian REIT; Canopy Growth Corp.; Caribbean Utilities Co.; Cisco Systems Inc.; Colliers International Group Inc.; Constellation Software Inc.; Dr Pepper Snapple Group Inc.; Equifax Inc.; Fairfax India Holdings Corp.; First Capital Realty Inc.; H&R REIT; Hilton Worldwide Holdings Inc.; Home Capital Group Inc.; Iqvia Holdings Inc.; Liberty Global PLC; Mandalay Resources Corp.; Marathon Oil Corp.; Molson Coors Brewing Co.; Morguard REIT; Neptune Technologies & Bioressources Inc.; Russel Metals Inc.; Sherritt International Corp.; Sienna Senior Living Inc.; Smart REIT; Sun Life Financial Inc.; Superior Plus Corp.; Teck Resources Ltd.; Waste Connections Inc.; West Fraser Timber Co. Ltd.; Williams Companies Inc.; Winpak Ltd.; Yamana Gold Inc.

More reading: Wednesday's small-cap stocks to watch
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Economic News

Americans cut back on purchases of cars, furniture and a variety of other products in January, pushing retail sales down by 0.3 per cent, the biggest decline in 11 months.

The Commerce Department said Wednesday that the January decline, following no change in December, was the largest setback since a 0.5 per cent fall in February of last year. The slowdown follows three sizzling months from September through November, gains that propelled holiday sales to the strongest showing in a decade.

The January weakness was larger than had been expected and could trim overall growth forecasts for the current quarter. Many analysts have been forecasting the economy could expand at a solid 3 per cent pace in the current quarter in large part because of a belief that consumer spending will remain strong.

U.S. consumer prices rose more than expected in January, with a measure of underlying inflation posting its biggest gain in a year, strengthening expectations that price pressures will accelerate this year and prompt a faster pace of interest rate increases from the Federal Reserve.

The Labor Department said its Consumer Price Index increased 0.5 per cent last month as households paid more for gasoline, rental accommodation and healthcare. The CPI rose 0.2 per cent in December. The year-on-year increase in the CPI was unchanged at 2.1 per cent as the large price gains from last year dropped out of the calculation.

Excluding the volatile food and energy components, the CPI shot up 0.3 per cent. That was the largest increase since January, 2017, and followed a 0.2-per-cent rise in December. The year-on-year rise in the core CPI was unchanged at 1.8 per cent in January, also because of less favourable base effects.

Economists polled by Reuters had forecast the CPI increasing 0.3 per cent in January and the core CPI rising 0.2 per cent.

(10 a.m. ET) U.S. business inventories for December. Estimate is an increase of 0.4 per cent from November.

(10:30 a.m. ET) EIA Petroleum Status Report.

Also: Canadian motor vehicle sales for December, which are estimated to decline 1.0 per cent year over year.

With files from Reuters and Bloomberg

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