RPT-LIVE MARKETS-Don't Assume Inflation Is Not A Risk

(Repeats to fix case in headline)

* Major indexes green; small caps outperform

* Materials lead S&P gainers; utilities weakest group

* Dollar slips; gold up, crude down

* U.S. 10-Year Treasury yield ~1.57%

By Chuck Mikolajczak

April 21 - Welcome to the home for real-time coverage of markets brought to you by Reuters reporters. You can share your thoughts with us at markets.research@thomsonreuters.com

DON'T ASSUME INFLATION IS NOT A RISK (1411 EDT/1811 GMT))

While the probability that inflation could be higher than people think is growing, many investors seem to be downplaying the risks, according to Richard Bernstein, CEO & chief investment officer of Richard Bernstein Advisors.

"One wants to be very careful about assuming that you can't have inflation," he said during RBA's quarterly webcast late Tuesday.

The investment world keeps favoring long duration equities, he said, and "you don't want to be in long duration equities when long term interest rates are going up," Bernstein said.

If it seems this inflation view is already the consensus on Wall Street, then "why is everybody talking about bitcoin? Why is everybody talking about innovation and disruption? Why are people talking about tech? That is not what works when long-term interest rates go up," Bernstein said.

"The investment world has taken on a momentum attitude that if it's going up, it must be good, and that's what will work in the future. We know that's not a good way to invest."

Going forward, he said, having money in cash could become a good strategy.

"Maybe cash becomes an active strategy ... if you think inflation could surprise on the upside for longer - that's it's just not temporary. Cash could actually be a viable strategy."

Economically sensitive sectors like energy also are a good strategy, he said.

(Caroline Valetkevitch)

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CITI'S BREAK UP DOES NOT GO FAR ENOUGH -ANALYST (1352 EDT/1752 GMT)

Citigroup (NYSE: C )'s stock has fallen roughly 3% since the bank's new Chief Executive Jane Fraser announced last week that the bank plans to exit retail banking operations in 13 countries to focus more on wealth management.

One analyst suggests that the bank would be better off breaking itself up than exiting individual businesses, as it has done in recent decades.

"The company should seriously consider stopping this erratic and poorly thought-out process of dissolution and lay out a well-researched program of dissolving the company," Dick Bove, an analyst with Odeon Capital Group, wrote in a note to investors on Wednesday.

Citi is closing a number of its international bank operations to bring its returns closer in line with U.S. big bank peers JPMorgan Chase & Co (NYSE: JPM ) JPM.N and Bank of America (NYSE: BAC ) BAC.N , Fraser said on CNBC earlier in the week.

That strategy is not new, Bove wrote, listing more than a dozen domestic and international businesses Citi sold in recent decades, which totaled more than $1 trillion in assets, according to his estimates.

Fraser indicated in the CNBC interview that there may be more divestitures to come. Bove argues Citi organize its existing bank into four structures - an international bank, a credit card company, a retail bank and Mexican bank - and sell them all.

"The one strategy that has been constant at Citigroup for the past 25 years is to break up the institution," Bove wrote. "The process has been disorganized and erratic. The time has come to take hold of the business model and complete the total elimination of this company."

(Elizabeth Dilts Marshall)

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COUNTERPUNCHING (1237 EDT/1637 GMT)

After back-to-back declines, major averages on Wall Street are higher at the midday point of the session despite a sluggish start, in part due to a 7% drop in Netflix NFLX.O following its quarterly results late Tuesday. reflation trade has found its footing, with energy .SPNY the best performing of the 11 major S&P sectors, even as crude prices dip, followed by gains in materials .SPLRCM , industrials .SPLRCI and financials .SPSY .

Small caps, which have struggled of late, are leading all major indexes, with analysts closely watching the 2,150 level on the Russell 2000 .RUT for signs of a change in trend as the index forms a "head and shoulders" technical pattern.

A gain of more than 8% in Intuitive Surgical ISRG.O is helping offset the Netflix decline on the heels of strong quarterly results. is your market snapshot:

(Chuck Mikolajczak)

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A FLASHLIGHT FOR THE FED (1140 EDT/1540 GMT)

With the Federal Reserve in its "blackout period" ahead of its policy statement on April 28, the Wells Fargo (NYSE: WFC ) Economics Group on Monday offered their view on what they expect to come out of the meeting.

According to the group, led by chief economist Jay Bryson, they believe it is "essentially unfathomable" that the FOMC would announce any major policy changes as committee members have made it clear through their "dot plots" and public statements they do not intend to raise the target range for the fed funds rate anytime soon.

The group also believes the Fed will sit tight on its current rate of asset purchases, currently at $80 billon of Treasury securities and $40 billion in mortgage-backed securities each month. However, they expect there to be more focus during Chair Powell's press conference on what might meet the Fed's "substantial" definition for improvement in employment and inflation targets before reducing purchases.

Given the central bank's "more outcome-based approach to policy" leads the group to believe the Fed will need to see "at least" the same degree of progress observed in 2013 "when it first floated and then eventually announced tapering," noting payrolls are 5.5% below their pre-Covid high compared to 1.7% below the 2008 peak when the Fed first broached tapering in 2013.

Under the firm's view, payrolls will not recover to the degree needed until December of this year, with core PCE, the Fed's preferred barometer of inflation, not "convincingly" passing the 2% mark until the fourth quarter of this year. As the firm believes the Fed will also need to be confident the pandemic will be reaching an end later this year, "any hint" of tapering is likely months away.

One minor technical adjustment Wells Fargo says to watch for, is the possibility of a 5 basis point increase on the interest rate paid on excess reserves, although they caution it should not be viewed as foreshadowing of a tightening in policy, but instead a "plumbing" adjustment to take the downward pressure off short-term rates stemming from the current excess liquidity in the banking system.

(Chuck Mikolajczak)

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MORTGAGE DEMAND JUMPS AS RATES DROP TO TWO-MONTH LOWS (1015 EDT/1415 GMT)

The housing market has been the primadonna of the economic recovery, cheekily surpassing pre-pandemic levels as low rates and the quest for home office space lit the demand fuse.

But while recent headwinds affecting affordability appear to have taken the sector out of high gear, data released on Wednesday suggest there still may be some gas in the tank.

A drop in interest rates prompted an 8.6% jump in mortgage demand last week, according to the Mortgage Bankers Association (MBA).

Applications for loans to purchase homes USMGPI=ECI and refinance existing mortgages USMGR=ECI rose as the average 30-year fixed contract rate USMG=ECI shed 7 basis points to 3.20%, its lowest level since the February deep freeze.

"Borrowers acted on the decrease in rates for most loan types, with both conventional and government refinance applications showing gains," said Joel Kan, associate vice president of Economic and Industry Forecasting at MBA.

Heightened demand and historically low mortgage rates have pushed inventories to record lows in recent months. This, combined with spiking materials prices - particularly lumber - have in turn pushed home prices beyond the grasp of many potential homebuyers, particularly those at the lower end.

"The housing market is facing both tailwinds and headwinds. Pent-up demand and a strong economic rebound should support sales," said Nancy Vanden Houten, lead economist at Oxford Economics. "However, tight inventories – particularly of less expensive homes - and home prices at multi-year highs will put homebuying out of reach for many households."

The state of the housing market will come into sharper focus on Thursday, when the National Association of Realtors releases its existing home sales data for March.

Economists polled by Reuters expect an 0.8% gain, marking a fractional rebound from February's 6.6% plunge, which was exacerbated by a spate of brutal winter weather.

As for housing stocks, investors appear to believe the sector still has some legs.

The Philadelphia SE Housing index .HGX has handily outperformed the broader market over the past year, rising more than 109%, more the double the S&P 500's .SPX 51% advance over the same time period.

Wall Street was modestly in morning trading with the tech-laded Nasdaq recently joining the Dow and S&P 500 in the green, although its gains were limited by megacap market leaders, with Apple AAPL.O and Netflix NFLX.O weighing heaviest.

(Stephen Culp)

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NASDAQ COMPOSITE: TROOPS CONTINUE TO FLEE (0900 EDT/1300 GMT)

The Nasdaq Composite .IXIC has suddenly come under pressure. Of note, this weakness was preceded by a breadth/momentum divergence, as the great mass of Nasdaq troops had been fleeing the battle field, failing to support the generals in the trenches. the Nasdaq ended last Friday at 14,052.34, or just around 0.3% from its 14,095.47 February 12 record close, the Nasdaq daily advance/decline line .AD.O was well below its commensurate February levels.

With Tuesday's IXIC decline, the A/D line has now broken support, and fallen to its lowest level since early January.

Meanwhile, another breadth/momentum measure, the McClellan Summation (McSum) .AD.O , which had collapsed from its mid-February all-time high into negative territory, has now fallen to its lowest level since early October. And this with the Composite only down around 2% from last Friday's close:

Just since late 2018, significant Nasdaq selloffs were preceded by McSum divergence. The McSum does have support in the -2,553/-2,598 area, but that zone is well below Tuesday's -1,889 close.

Thus, it now remains to be seen just how protracted and deep any Composite decline proves to be. But until its great mass of troops re-group, and march to the upside, the IXIC may remain vulnerable to further bear raids. Gabriel)

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FOR WEDNESDAY'S LIVE MARKETS' POSTS PRIOR TO 0900 EDT/1300 GMT - CLICK HERE: IXIC04212021

https://tmsnrt.rs/2QNgQpN MBA

https://tmsnrt.rs/3dC33LS Housing stocks

https://tmsnrt.rs/3xcXX0n Midday levels April 21

https://tmsnrt.rs/3gsaaIA

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Terence Gabriel is a Reuters market analyst. The views expressed are his own)