Europe trades broadly higher, FTSE lags as GDP misses forecast

European stocks are heading broadly higher in muted trade ahead of key US inflation data. The FTSE is underperforming its peers following weaker than forecast growth numbers, whilst the Dax is shrugging off disappointing sentiment numbers.

The UK economy expanded 0.4% in February, a firm rebound from January's -2.2% contraction, but still falling short of the 0.6% expected.

The UK economy contracted by 10% last year as the pandemic ravaged the dominant service sector. The recovery across Q1 will likely be slow, given the economy was still in lockdown, although businesses were preparing for the reopening. 

Following yesterday's easing of restrictions coupled with the UK's swift vaccine program, January appears to be a low point, with growth picking up from February onwards. 

Elsewhere in Europe, the DAX continues to hover around its all-time high despite sentiment data proving to be a mixed bag. The closely-watched German ZEW Sentiment Index headline figure dropped unexpectedly to 70.7 in April, significantly below the expected 79. Fears surrounding tighter lockdown conditions are dampening expectations for household consumption.

Looking ahead, US futures are pointing to a muted but mildly positive open as investors focus on the CPI release due. Inflation expectations have become a key driver for the markets over recent months as optimism surrounding a strong US economic recovery grows. While the Fed has stuck unwaveringly to its dovish hymn sheet, insisting any rise in inflation is expected to be short term, markets are still focusing firmly on when any monetary policy tightening could begin.

It may not be just inflation and jobs data that the market should be watching closely; vaccination numbers could also be in the mix. The Fed's Bullard highlighted a 75% vaccination level as a guide to begin tapering talks, giving the markets a number on which to focus.

FX US dollar looks to CPI data, AUD underperforms

The US dollar is edging higher, paring mild losses from the previous session. Trading is subdued as investors look ahead cautiously to the CPI data release due later today. 

The yield on the benchmark 10-year treasury yield has gained two basis points following a closely watched 10-year bond auction and sits at 1.69%. However, this remains well below the one-year high of 1.78% mark hit at the end of March. Yields and inflation expectations will remain under the spotlight as CPI data is released. Expectations are for an increase of 0.5% month-on-month and 2.5% on an annual basis, up from 1.7% in February. A strong-than-forecast number could lift yields, boosting the US dollar.

The Australian dollar is underperforming its major peers following disappointing trade data from China. China saw exports fall short at 30.6% in March compared to a year earlier against forecasts of a 35.5% increase. Meanwhile, imports rose to a 38.1% increase against a 23.3% annual rise expected. 

The weak figures raised concerns over the Chinese economic recovery running out of steam, hitting the China proxy, the Australian dollar.

Oil rises on upbeat Chinese crude import data

Oil prices are picking up for a second day, slowly clawing back some of last week's steep losses. Upbeat data from both China and India and tension in the Middle East are supporting oil prices.

Crude imports into China jumped 21% in March, albeit from a low base the year before, as refining operations and fuel demand ramped up during pandemic recovery.

India is emerging as the latest covid hot spot. However, rather than depressing gasoline demand, demand has surged to a four-month high as millions of people favour their car over public transport. Tighter lockdown restrictions could see this trend quickly reverse.

Looking forward, crude oil stockpiles are expected to have declined last week for a third straight week. However, gasoline inventories are expected to have risen as lockdown restrictions tightened in Europe and parts of South America.

Gold's outlook remains bearish

Gold remains firmly out of favour for a third consecutive day as the market focuses on higher yields. Inflation expectations are very much in focus after US wholesale inflation PPI posted the largest annual gain in 9½ years in March and ahead of CPI data later today.

However, gold as an inflation hedge is playing second fiddle to the reflation theme, with markets focusing on when rates can start rising and how high they can go. Rising interest rates are negative for non-yielding gold.

As a result, gold has been under pressure for the past few months, and the outlook for the precious metal remains bearish. A weaker-than-forecast CPI read later today could offer some short-term reprieve for gold, although bears are likely to remain focused on support at USD1,716.