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Wall Street stabilises after Target warns on profit margins

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Wall Street stocks ticked higher following earlier swings after US retailer Target slashed its profit outlook for the second time in weeks, sparking questions over the health of the world’s largest economy.

The blue-chip S&P 500 share index, which has registered weekly losses for eight of the past nine weeks, was 0.6 per cent higher in mid-afternoon New York trade. The technology-focused Nasdaq Composite index had also risen 0.6 per cent.

The yield on the 10-year Treasury note fell 0.08 percentage points to 2.96 per cent as the low-risk government debt security’s price rose. Prices of UK and German government bonds also moved higher.

Shares in Target dropped 3.9 per cent after the group warned it would have to shift excess stock with deeper discounts, in a move that was expected to lower its second-quarter operating margin to about 2 per cent. The group last month estimated margins would be “in a wide range” of about 5.3 per cent.

Following a mixed quarterly earnings season, equity investors are debating whether the excess savings US consumers built up during coronavirus restrictions will be enough to sustain spending rates and prevent a recession. While Walmart cut its earnings guidance last month, along with Target, department store group Macy’s and home improvement chain Home Depot raised theirs.

“It’s possible that consumer spending holds up and inflation recedes quickly enough to keep the US economy going,” said Joost van Leenders, equity strategist at Kempen Capital Management.

“Equally, there’s a possible story that inflation remains high, the [Federal Reserve] has to do more and there is a recession.”

The FTSE All-World index of global stocks has dropped more than 14 per cent this year as central banks worldwide have lifted borrowing costs to battle inflationary trends that began with coronavirus-related supply chain glitches and were exacerbated by commodity price rises caused by Russia’s invasion of Ukraine.

US inflation data on Friday are expected to show consumer prices in the world’s largest economy rose at an annual rate of 8.3 per cent in May, the same as the previous month. Money markets anticipate the Fed raising its main funds rate by half a percentage point at its June and July meetings, with some policymakers signalling the run of increases will extend into September.

“We have priced what we know so far, and we need to be ready to price an improvement, or a lack of one,” said Marco Pirondini, head of US equities at Amundi. “By the end of the summer, if we are still in a regime of high inflation and [oil] sanctions against Russia, then the market has further to correct.”

Following a shortlived rally on Monday driven by China loosening some Covid-19 restrictions, Europe’s regional Stoxx 600 share index lost 0.3 per cent.

Germany’s 10-year Bund yield, a benchmark for borrowing costs in the eurozone, dropped 0.03 percentage points to 1.29 per cent despite widely held expectations that the European Central Bank will begin raising interest rates from July.

“We foresee significant volatility in bond markets around the ECB meeting this week as the communication challenge of the policy strategy is formidable,” said Andreas Billmeier, European economist at Western Asset.

The dollar index, which measures the US currency against six others, traded flat. Brent crude, the oil benchmark, added 0.1 per cent to $119.64 a barrel.

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