By Herbert Lash and Danilo Masoni
NEW YORK/MILAN (Reuters) -World shares wavered and bond yields slid on Tuesday after a surprise rate hike in Australia unsettled investors, but Target Corp (NYSE:TGT)'s warning on profit margins also included plans to slash prices, a sign that inflation may be peaking.
Target cut its quarterly profit margin forecast and said it would offer deeper discounts to clear inventory as decades-high inflation saps consumer demand.
The surprise forecast revision sent shares of the retailer 3.5% lower and knocked the retail sector of the pan-European STOXX index down 0.9% as the announcement at first weighed on broader markets.
But Wall Street stocks rebounded and European equity markets trimmed losses as investors saw Target's plans as ultimately pointing to slowing inflation.
"Target cuts both ways. On the one hand obviously it's negative news for Target. But on the other it's one of the first large signals that inflation may be peaking," said Rick Meckler, a partner at Cherry Lane Investments.
"Of course, this is the scenario of a soft landing. That we raise rates, that it reins in inflation some, but it doesn’t stop the economy," he said.
Anthony Saglimbene, global market strategist at Ameriprise Financial (NYSE:AMP), said Target's announcement suggested more companies will lay the groundwork for reduced earnings.
"We could see an earnings recession this year without seeing an economic recession, which would mean we would get zero earnings growth," he said. "That's a headwind for stocks."
The Reserve Bank of Australia raised interest rates by 50 basis points - the most in 22 years - and flagged more tightening ahead as it moves to restrain surging inflation.
The Federal Reserve also has tightened monetary policy and the European Central Bank is expected to start later this week.
"Central bankers are playing catch up with the fact that inflation is very, very high and they need to kind of tamp it down through higher rates," Saglimbene said.
The yield on 10-year Treasury notes fell 6.6 basis points to 2.972%, below the key 3% threshold ahead of data on Friday expected to show still high U.S. inflation.
A high reading would firm up expectations that the Fed could raise rates more than the expected 50 basis points increase at its upcoming policy meeting next week and in July.
In Europe, benchmark 10-year German bund yields also dipped 4.1 basis points but held near Monday's highs ahead of the ECB meeting on Thursday. They last traded at 1.288%.
British Prime Minister Boris Johnson survived a no-confidence vote among his Conservative Party's lawmakers on Monday, but the thin margin of victory spurred talk of a move to replace him, hitting sterling and gilts.
"The vote casts significant doubt about his tenure as leader," said JP Morgan economist Allan Monks.
"Assuming he can buy enough time, the outcome increases the chance that fiscal policy is loosened further in an attempt to turn the situation around. If not, he could yet be forced out with the Conservatives electing a new leader (and hence prime minister)," he added.
Ten-year gilt yields hit a seven-year high at 2.265% and were last almost flat on the day.
In foreign exchange markets, nerves ahead of the U.S. inflation data kept the dollar in demand.
The dollar index fell 0.068%, with the euro unchanged at $1.0694 on expectations of a hawkish ECB tilt.
The U.S. currency rose to its the highest since 2002 against the yen and was last up 0.46% after the Bank of Japan governor promised support for the economy and easy monetary policy even as prices start to rise.
Sterling was last trading at $1.2578, up 0.38% on the day.
The Australian dollar gained as much as 0.76% just after the supersized RBA rate hike, but quickly shed gains to trade flat on the day.
Oil prices rose in a seesaw session on Tuesday as the market weighed risk sentiment against supply concerns and the prospect of higher demand after relaxation of China's COVID curbs.