By Joice Alves

LONDON (Reuters) - Big European companies have delivered significantly stronger than expected first-quarter results, defying a challenging economic backdrop that includes surging inflation and rising interest rates.

But European stocks are down from a 14-month high in April, as investors worry about the health of the global economy, falling customer demand and pressures building on profit margins.

About half of the STOXX 600 companies have reported first-quarter results and two thirds of them exceeded estimates, a stronger performance than in most quarters when about half of companies typically beat earnings estimates.

"It's still the case, that a resilient consumer, supported by excess savings and a strong labour market continues to absorb higher prices and support corporate profitability," wrote Bernstein strategists Mark Diver and Sarah McCarthy.

While banks had to be rescued in the United States and in Switzerland, first-quarter results from the euro zone's biggest bank BNP Paribas (OTC:BNPQY), British lender Barclays (LON:BARC) and Germany's biggest bank Deutsche Bank (ETR:DBKGn) all beat forecasts.

Consumer group Nestle and the maker of Dove soap and Ben & Jerry's ice cream Unilever (NYSE:UL) reported stronger than expected results as price increases offset lower volumes.

Europe's largest listed company LVMH produced stellar sales as China rebounded sharply after COVID restrictions ended.

Earnings at STOXX 600 companies are currently expected to grow 7.3% in the first quarter, a big turnaround from a 2.5% decline expected only four weeks ago, based on Refinitiv I/B/E/S data.

But the pan-European stock index is around 7% below a record peak hit in January 2022, before the Ukraine invasion.

It is trading about 1% lower since the start of the earnings season when it hit its highest since February 2022 following a spurt supported by China's post-COVID reopening and declining energy prices. The current declines are broadly in line with global markets.

BofA said European equities have seen nine straight weeks of outflows.

'CLOUDS ON THE HORIZON'

Last week, JP Morgan downgraded euro zone stocks to "underweight" highlighting that they had already gained 30% against the U.S. since their lows touched in September.

"(Strong earnings season) was not enough to bring global markets to make new highs probably due to the clouds that are still present on the horizon," said Luca Finà, head of equity at Generali (BIT:GASI) Insurance Asset Management, mentioning rising cost of capital and default risks of the U.S. debt ceiling.

The robust corporate margins on show in the first quarter are seen coming under pressure later in the year.

Based on Refinitiv I/B/E/S estimates, STOXX 600 companies are expected to report net profit margins of 11.4% in the first quarter, up from 10.2% in the last quarter of 2022.

But margins are seen declining to 10.5% in the third quarter, according to Refinitiv estimates.

"(If) Q1 sets an example for 2023, sales growth could remain resilient, but margins will have a hard time improving in this context of higher (interest) rates," said Florian Ielpo, head of macro at multi asset group Lombard Odier Asset Management.

"Higher rates mean higher funding costs and lower CAPEX at the moment, and eventually it will mean a lower demand, declining sales and a lower pricing power as the consumer end will come under pressure," he said.

New data from China shows inflation has flatlined and imports have declined, clouding the outlook for the global economy.

Analysts also flagged that consumers across Europe, who have so far coped with the cost-of-living squeeze better than many expected, could eventually run out of savings.

Cyclicals delivered the bulk of the EPS beats, led by industrials and consumer discretionary, Barclays said.

The European Commission said on Monday it expects euro-zone inflation, currently at 7%, to remain stubbornly high this year, with economic growth forecast at 1.1% this year and 1.6% in 2024.

Europe's largest technology company ASML Holding (NASDAQ:ASML) NV beat earnings forecasts but noted some signs of caution among customers.

Telecoms group Vodafone (NASDAQ:VOD) plans to cut 11,000 jobs over three years after it warned that a poor performance in its biggest market Germany would hit cash flow.

But there has not been a wave of companies revising earnings forecasts down, providing a cushion for European equities.

"Guidance has been less positive in Q1 but there has been no material rise in percentage of firms guiding lower," Barclays said.

By Timothy Aeppel

CHICAGO (Reuters) -For Matthew Prange, it's easy to see why the inflation surge of the last two years has proven so difficult for the Federal Reserve to tame.

"When prices go up, it tends to stick," said Prange, who oversees $3 billion worth of purchases of electronic parts, plastics, and metal as the top supply chain manager at Milwaukee Tool, a venerable Wisconsin toolmaker owned by Hong Kong-based Techtronic Industries (OTC:TTNDY) Co.

The view among economists during the COVID-19 pandemic was that the burst of inflation was an inevitable result of the sudden increase in demand for goods by people stuck at home with plenty to spend. Global supply chains grew overwhelmed as they struggled to deliver.

But Prange said most of his supply chain had stabilized - meaning he was able to get most of what he needed - by the end of 2021. And yet the outsized price increases kept coming and, in some cases, he said, continue today.

Milwaukee Tool is among the companies, including Cummins Inc (NYSE:CMI) and Schneider Electric (EPA:SCHN), gathered in Chicago this week at a Reuters Events supply chain conference. They described what they view as the slow and uneven decline of inflation, with some of them seeing the pace of price increases ease in one part of their business but continue to surge in others.

"One of the headwinds is inflation," said Kevin Austin, the supply chain chief for Toyota Motor (NYSE:TM) North America. He attributed the price pressures in part to pent-up demand, which remains strong in the auto industry even as the economy has slowed.

Inflation has fallen as the Fed has raised its benchmark overnight interest rate by 5 percentage points over the last 14 months - the fastest pace of rate hikes in four decades. The annual increase in U.S. consumer prices slowed to below 5% in April for the first time in two years.

Still, that and other measures of inflation tracked by the Fed remain well above the U.S. central bank's 2% target. Data from the Philadelphia Fed on Thursday showed the path to lower inflation remains uneven: its monthly index of prices paid by manufacturers in its region rose for the second time in the past four months.

Meanwhile, the global supply chain snarls of the pandemic have diminished. The New York Fed's Global Supply Chain Pressure Index ticked down to a reading of -1.32 in April, compared to a revised -1.15 in March. Negative readings point to pressures that are below the historical average.

"There’s still dislocation in global supply chains," said George Koutsaftes, president and CEO of Honeywell (NASDAQ:HON) Safety and Productivity Solutions.

But inflation pressures have moderated, he said. "And as we look 12 to 18 months out, we see it moderating even further."

The challenge now is that factors that emerged in the pandemic have become endemic, Koutsaftes said. Labor shortages continue, for instance, and the rush to regionalize supply chains has increased demand for commodities in many parts of the world.

NOT A UNIFORM PICTURE

Economists attribute the persistence of relatively high inflation to factors beyond strained supply chains. The risks of long global pipelines for goods, which were highlighted by the pandemic, and growing geopolitical tensions - the war in Ukraine and a souring U.S.-China relationship - have sparked a rush to move production closer to end markets. Those new factories, however, are costly to build and the goods they produce come at a higher price.

Ken Engel, who manages the North American supply chain for Schneider Electric, a French electrical equipment maker, said he noticed a shift in attitude among customers over the last six months. He no longer hears from people desperate to find goods. Instead, they are asking when they will see lower prices.

But the picture is not uniform. "It differs by business," Engel said. For instance, Schneider makes small circuit breakers widely used in residential construction, which has slowed under the weight of higher interest rates. By contrast, demand for the company's "engineered-to-order" electrical parts to build data centers continues to boom.

"For the cloud providers" building those massive data centers, he said, "there's been no slowdown."

Much like Milwaukee Tool, Engel said Schneider's North American factories have largely recovered from the shortages of the last few years. But supplies can still be spotty, which often means paying more for those scarce items.

"Our problem is our upstream suppliers," such as firms that mold plastic parts, Engel said. In many cases, those suppliers have all the materials and machinery they need but lack the labor to produce enough to meet orders, he said.

Mario Guerendo, who oversees the global supply chain for Cummins, said one bright spot for the Columbus, Indiana-based engine maker has been rapidly falling shipping and logistics costs.

"It was crazy during COVID," he said.

And yet, the same thing is not happening with many of the raw materials that the company buys. Steel prices, for instance, have eased but remain well above pre-pandemic levels.

"We're also seeing it vary depending on geography," he said.

By Rae Wee

SINGAPORE (Reuters) - The dollar firmed near a six-month peak against the yen on Friday on the back of rising U.S. Treasury yields, as optimism over debt ceiling talks in Washington raised expectations of higher-for-longer interest rates.

President Joe Biden and top U.S. congressional Republican Kevin McCarthy earlier this week underscored their determination to strike a deal soon to raise the government's $31.4 trillion debt ceiling, with hopes of finalising a deal after Biden returns from the Group of Seven meeting in Japan on Sunday.

The news helped calm fears of an unprecedented and economically catastrophic American debt default, leading markets to revise their expectations of where U.S. interest rates could go.

At the same time, data pointing to a still-tight labour market, with the number of Americans filing new claims for unemployment benefits falling more than expected last week, also reinforced expectations that the Federal Reserve could deliver another rate hike next month in a bid to tame inflation.

Two Fed policymakers also said on Thursday that U.S. inflation does not look like it is cooling fast enough to allow the Fed to pause its interest-rate hike campaign.

The dollar stayed elevated in early Asia trade on Friday and last bought 138.40 yen, having risen to a near six-month high of 138.75 yen in the previous session.

The greenback was eyeing a weekly gain of nearly 2% against the Japanese currency, its largest since February.

Similarly, the U.S. dollar index was last at 103.46, flirting with Thursday's two-month high of 103.63, and was headed for a second straight weekly gain of more than 0.7%.

"Optimism about the debt ceiling (talks) has contributed to a repricing for the Fed ... the fact that (a deal) would remove a big weight on the economy, effectively," said Ray Attrill, head of FX strategy at National Australia Bank (OTC:NABZY) (NAB).

"It does remove one obstacle to the Fed continuing to raise rates."

Money markets are now pricing in a 39% chance that the Fed could raise rates by another 25 basis points next month, compared with just about a 10% chance a week ago, according to the CME FedWatch tool.

Traders have also pared expectations on the scale of rate cuts expected later this year, with rates seen just above 4.6% by December.

U.S. Treasury yields have climbed on the back of the hawkish Fed repricing and amid a pick up in risk sentiment. Yields rise when bond prices fall.

The two-year Treasury yield, which typically moves in step with interest rate expectations, last stood at 4.2581%, edging away from a low of 3.964% at the start of the week.

The benchmark 10-year yield was last at 3.6476%, having risen nearly 20 bps this week.

In other currencies, the euro rose 0.06% to $1.0777, but languished near the previous session's close to two-month low of $1.07625.

Sterling gained 0.05% to $1.2415, having fallen about 0.6% on Thursday.

The Aussie edged 0.17% higher to $0.6633, having slid on Thursday against a stronger dollar and on data showing that Australia's employment unexpectedly dipped in April.

In Asia, Japan's core consumer prices rose 3.4% in April from a year earlier as price hikes broadened, data showed on Friday, casting doubt on the central bank's view inflation will slow back below its 2% target later this year as cost pressures dissipate.

"I do think that the numbers do mean that the June and July meetings are live for a possible YCC tweak," said NAB's Attrill, referring to the Bank of Japan's controversial yield curve control policy.

By Aishwarya Venugopal

(Reuters) - Lower input costs and inventories, as well as extended price hikes are pushing a quicker-than-expected recovery in margins at U.S. consumer-facing firms including PepsiCo (NASDAQ:PEP), Kraft Heinz (NASDAQ:KHC), and Target , their recent earnings reports indicated.

Investors have zeroed in on gross margins, that faltered in the past several quarters, as high inflation and interest rates persist. Margins now seem brighter for these retailers and consumer-goods makers, who in the past few weeks sounded more optimistic about the metric than they did last quarter.

This is true especially for companies that make or sell essentials such as groceries and household staples, and even for restaurants and cafes, as strong wage gains in a tight labor market underpin consumer spending.

Still, people are being cautious about big-ticket, discretionary spending, and a bump from the lifting of COVID curbs in China has been slower than expected. Some analysts said a full recovery in margins is a few quarters away.

According to Refinitiv data as of May 12, quarterly margins for consumer discretionary components of the S&P 500 index is expected to increase year-over-year for every quarter this year.

"In this environment of uncertainty ... (consumer staples) margins are going to be solid because most of the input costs going into staples are falling precipitously and that's the positive," said Art Hogan, chief market strategist at B Riley Wealth.

"They have (raised prices enough) ... and they have held that price, so they are only going to see improvement in margins."

Full-year sales and earnings outlook for Target Corp (NYSE:TGT), which saw margins improve in the first quarter, implies a margin range of 4.7% to 5.0%, up from 3.5% in 2022, according to D.A. Davidson analyst Michael Baker.

Kraft Heinz Chief Financial Officer Andre Maciel said earlier this month that commodity costs were falling slightly faster than expected.

The maker of Philadelphia Cream Cheese and Jell-O said its gross margins in the quarter ended March improved by about 130 basis points. The company joined a list of consumer staples firms including Kellogg (NYSE:K) Co and PepsiCo Inc in raising its annual forecast for 2023.

PepsiCo reported March-quarter margins, or the ratio of gross profit to revenue for the company, that were higher than a year earlier and said its average selling price increased 16% in the quarter.

Prices at rival Coca-Cola (NYSE:KO) Co rose by 11%, and though quarterly margins fell from the same period a year earlier, they improved from the prior quarter.

Margins at McDonald's Corp (NYSE:MCD) and Starbucks Corp (NASDAQ:SBUX) improved as well.

'STUBBORN INFLATION'

But retail giant Walmart (NYSE:WMT) Inc, which gets about half of its revenue from low-margin groceries, took a more cautious stance on margin recovery on Thursday even as it raised its annual sales and profit targets.

"Stubborn inflation in dry grocery and consumables is one of the key factors creating uncertainty for us in the back half of the year," Walmart CEO Doug McMillon said.

While its U.S. margins fell 41 basis points in the first quarter, it was an improvement on the 112-basis point decline in the fourth quarter.

Walmart said total inventory in the quarter ended April fell 7% versus flat in the fourth quarter. This is in line with other retailers who are stocking more of what consumers are buying in a weak economy.

Target said on Wednesday that inventory in the first quarter was 16% lower and it had doled out fewer clearance discounts.

"Even today against a very challenging backdrop we're starting to assemble the building blocks for a recovery in our operating margin rate back towards its longer-term potential," Target CFO said.

By Rachel Savage

JOHANNESBURG (Reuters) - Ghana's debt restructuring is targeting $10.5 billion of external debt service relief from 2023 to 2026, the International Monetary Fund said late on Wednesday in its Debt Sustainability Analysis.

Ghana's debt is currently unsustainable, but the country aims to restore it to a "moderate" risk of debt distress by 2028, the fund added.

The IMF's executive board approved a $3 billion, three-year rescue loan on Wednesday, paving a potential path out of the worst economic crisis in a generation for the embattled West African country.

Ghana is overhauling its debt after its already strained finances buckled under the economic fallout from COVID-19 and Russia's invasion of Ukraine. It is seeking external debt relief under the Group of 20's Common Framework platform and completed a domestic debt exchange earlier this year.

Ghana has a $15 billion financing gap in its balance of payments from 2023 to 2026, the IMF said, with the World Bank set to provide $1.6 billion in budget and balance-of-payments support.

The country has a medium "debt carrying capacity", which means the IMF requires Ghana to target bringing its public debt-to-GDP ratio from 88.1% at the end of 2022 to 55% by 2028.

"Domestic policy slippages represent a significant downside risk to the projections, further compounded by risks associated to the end-2024 general elections," the IMF report said.

Other risks for Ghana include social unrest if economic conditions do not improve for the population, not regaining market access to issue debt and the domestic debt exchange posing dangers to domestic financial sector stability, the fund said.

By Winni Zhou and Rae Wee

SHANGHAI/SINGAPORE (Reuters) - China's heavily managed yuan has dropped to multi-month lows and breached the closely watched 7-per-dollar level, and analysts who are predicting more weakness point to the U.S. Federal Reserve's policy as being the bigger driver than economic weakness at home.

The yuan, also referred to as the renminbi, hit 7.0234 per dollar on Thursday, levels last seen in December before euphoria over China's reopening after the COVID-19 pandemic lifted it for a few weeks.

As doubts grow about the strength of its economic recovery, foreign money has left China's markets and the currency has fallen 4% against the dollar since late January.

Analysts at Nomura and Societe Generale (OTC:SCGLY) say the yuan could soon head for 7.3, which as last plumbed in November. Kiyong Seong, lead Asia macro strategist at Societe Generale, says a wider monetary policy divergence between China and the U.S. coupled with lacklustre Chinese growth would result in a weaker yuan.

"An important part of the climb in dollar-yuan over the past month has to do with the dollar, so this is not just a renminbi story," said Alvin Tan, head of Asia FX strategy at RBC Capital Markets in Singapore.

Reflecting that, the trade-weighted CFETS basket against which the People's Bank of China (PBOC) manages the currency, has dropped to 99 from 100 in February.

Meanwhile, as the Fed weighs whether to pause its tightening after taking rates up 5 percentage points since March 2022, China appears set to keep monetary conditions loose amid growing signs its recovery is losing steam.

In the forwards market, the wide yield difference has the yuan trading stronger, thus disincentivising exporters to convert their earnings. Six-month yuan is trading at 6.89.

A Shanghai-based exporter, who didn't want to be quoted by name, said he was keeping his dollars for now, rather than swapping them for yuan.

"I know I shouldn't be too greedy, but the yuan will weaken to 7.3. I will wait," he said.

The PBOC has so far given little hint it is uncomfortable with the currency's recent moves or stepped in to defend it. But the RBC's Tan said authorities will be keen not to let the selling accelerate.

"So even if it's weaker, they prefer that it'd be orderly. And frankly, it has been generally orderly so far," said Tan.

The PBOC did not immediately respond to Reuters request for comments.

THE CHEAP CURRENCY

Becky Liu, head of China macro strategy at Standard Chartered Bank, expects the yuan will continue to depreciate.

"The interest rate gap remains wide, so many hedge funds continue to use yuan as a funding currency," Liu said.

    "Apart from the carry trade, the other is seasonality as the dividend payment season will start soon. So in the short term, we don't think the yuan has huge upside room, instead we think it will face some pressure."

Analysts at Nomura estimate mainland China firms listed and paying dividends in Hong Kong will make roughly $8 billion of dividend payments in each of June and July 2023.

The usual tailwinds for the yuan from capital inflows are also are flagging as exporters hold back flows and foreign investors hesitate to buy into the market until they are convinced of more solid economic momentum and regulatory support.

While foreign net buying of Chinese stocks has been around 193 billion yuan ($27.92 billion) so far in 2023, they have sold 226.5 billion yuan worth of bonds in the first four month of this year, according to Reuters calculations based on official data.

A look at commercial banks' foreign exchange operations shows they are selling more dollars on net. They sold $9.8 billion to their clients in the four months of this year, according to State Administration of Foreign Exchange.   

Yet, foreign exchange deposits grew $28 billion so far this year to $881.9 billion at the end of April, PBOC data shows.

($1 = 6.9121 Chinese yuan renminbi)

WELLINGTON (Reuters) - Six Pacific countries are at a high risk of debt distress in part due to government spending to respond to the COVID-19 crisis, the World Bank said in a report on Thursday.

The report, titled Raising Pasifika, said fiscal consolidation was needed in Kiribati, Republic of the Marshall Islands, Federated States of Micronesia, Samoa, Tonga and Tuvalu because these countries lack domestic debt markets and access to international capital markets.

Among other countries in the region, Vanuatu is rated at medium risk, while Palau and Nauru’s debt is sustainable, the report noted.

"While public debt levels as a share of GDP remain modest across most of the region, the PIC9’s economic geography and volatile revenue bases mean debt distress risks remain elevated," it said.

Debt has surged in the region since 2019 as the tourism-dependent economies were hit by COVID border closures, trade was hurt by logistical challenges and weather events caused damage. The World Bank last month said that Fiji must also take urgent action to reduce its debt burden.

Stephen Ndegwa, World Bank Country Director for Papua New Guinea & the Pacific Islands, said reducing debt, strengthening revenue and improving the quality of government spending are critical areas for Pacific countries to address.

The report said continued access to grants in line with pre-pandemic trends is also essential to find capital investment projects for sustainable development and climate resilience.

The World Bank report recommends that, together with more efficient spending, improvements to tax collection must be a priority for Pacific governments to ensure individuals and businesses are contributing their fair share to the region’s economies.

It also said that Pacific countries should allocate more to social assistance and protection measures.

“These investments would help reduce poverty and inequality, while also supporting communities in tough times, including in the aftermath of climate-related disasters or major economic shocks, such as the region saw from the COVID-19 pandemic and the recent natural disasters in Tonga and Vanuatu,” it said.

Investing.com -- U.S. President Joe Biden trims an overseas trip this week as lawmakers come out of a key meeting with guarded hopes for debt ceiling deal. Meanwhile, retail chain Target prepares to unveil its latest results, and fresh data is expected to provide new insight into the state of the U.S. housing market.

1. Debt ceiling deal "possible"

President Biden and House Speaker Kevin McCarthy carried a cautiously positive message out of their latest crunch meeting over raising the debt ceiling.

Following the talks on Tuesday, which included other top Congressional leaders, Biden said that the lawmakers were on "a path" towards reaching an agreement to increase the more than $31 trillion federal borrowing limit. The White House later added that Biden will shorten a planned trip overseas this week to participate in further negotiations in person.

For his part, McCarthy noted that "it is possible to get a deal by the end of the week."

However, the deadline to avoid an unprecedented default continues to edge closer, with the U.S. widely expected to run out of money to pay debtholders early next month. Such an occurrence, officials have warned, could prove to be catastrophic for the U.S. and have knock-on effects for the global economy.

2. Futures hold steady amid debt limit optimism

U.S. stock futures inched higher on Wednesday as investors gauged the guarded optimism from lawmakers in Washington over the debt limit negotiations.

At 04:57 ET (08:57 GMT), the Dow futures contract was up 94 points or 0.28%, S&P 500 futures traded 11 points or 0.27% higher, and Nasdaq 100 futures edged up 20 points or 0.15%.

Wall Street stocks dropped in the prior session, with the outlook for the negotiations still mired in uncertainty. The meeting between Biden, McCarthy, and Congressional leaders ended after U.S. markets closed on Tuesday.

The blue-chip Dow Jones Industrial Average and broad-based S&P 500 both slipped. The Nasdaq Composite also dipped, although strength in technology stocks helped mitigate these losses.

Government bond yields for both 2-year and 10-year notes moved higher, while bills maturing next month (when a U.S. default is projected to happen) saw their yields retreat from their highest mark since before the 2008 financial crisis. Prices fall as yields rise.

3. Target on deck

Target (NYSE:TGT) will become the latest U.S. retail chain to report its latest earnings this week, with investors keen to see how much price-conscious consumers are snapping up the company's food products.

Groceries have previously made up just over a fifth of Minnesota-based Target's total sales as shoppers chose to buy other items like bed sheets and beauty products. But with inflation at elevated levels, customers are widely expected to have relegated their spending to essential goods like food.

Target will report how well this demand for groceries held up when it releases its latest earnings before the start of U.S. trading on Wednesday.

Elsewhere, DIY group Home Depot (NYSE:HD) slashed its guidance on Tuesday after unfavorable weather contributed to weaker-than-expected sales. Shares in the firm fell.

On Thursday, low-cost retail giant Walmart (NYSE:WMT) will step into the limelight when it posts fresh results.

4. U.S. housing data ahead

On the economic data front, investors will have a chance on Wednesday to examine the health of the U.S. real estate market with the release of the housing starts and building permits figures for April.

Single-family housing starts, which typically accounts for a large portion of new homebuilding, jumped in March, while permits for these projects also surged to a five-month high.

Economists have suggested that a recent cooling in mortgage rates could be providing a boost to demand from homebuyers. These rates have fallen from their peaks reached last October and November as expectations grow that the Federal Reserve will pump the brakes on its long-standing monetary policy tightening campaign as soon as next month.

However, housing activity still looks to be some way off from a total revival. A decline in multi-family homebuilding dragged overall housing starts down by 0.8% to 1.420 million units in March, while total building permits also dropped.

5. U.S. crude stockpiles move higher

Oil prices hovered around the flatline on Wednesday after an unexpected rise in U.S. crude stockpiles exacerbated concerns over demand in the world's largest consumer.

U.S. crude inventories increased by around 3.6 million barrels in the week ended May 12, according to data from the industry body American Petroleum Institute, instead of an anticipated drawdown.

However, these losses have been limited as releases from the Strategic Petroleum Reserve have to be factored into the inventory build, while the drop in gasoline and distillates inventories pointed to improving demand ahead of the summer season.

At 05:11 ET, U.S. crude futures traded 0.04% lower at $70.83 per barrel, while the Brent contract inched up 0.04% to $74.94 a barrel.