EMEA Morning Briefing: Stocks May Get Lift From Fed Officials’ Comments

MARKET WRAPS

Watch For:

Germany PPI; U.K. monthly retail sales figures, aluminium production report; trading updates from Investor AB

Opening Call:

Shares in Europe could get a boost from two senior Federal Reserve officials’ comments that the central bank was making progress in its inflation fight. Asian stock benchmarks rose; Treasury yields were broadly higher; the dollar gained; while oil and gold also advanced.

Equities:

European stocks are seen opening higher despite Wall Street’s overnight retreat and concerns about the health of the economy after recent economic data and corporate-earnings reports.

Fed Vice Chair Lael Brainard and New York Fed President John Williams said in separate remarks on Thursday that the central bank was making progress in its inflation fight, but it would take time to bring inflation back to the Fed’s 2% target.

“What just some weeks ago would have seen markets cheering the weaker data as it would have suggested correctly that the Fed’s aggressive rate hike campaign is doing its job in tamping down the demand side of the economy, is now being judged more harshly with bad news no longer enjoying a warm welcome by traders and investors alike,” said Quincy Krosby, chief global strategist for LPL Financial.

Over the past few weeks, earnings expectations for the first quarter and the second quarter of 2023 switched from year-over-year growth to year-over-year declines, said John Butters, senior earnings analyst at FactSet.

Expectations for both quarters have been falling over the past few months, he added.

Forex:

The dollar gained in Asia, but Corpay’s Karl Schamotta cautioned that risk appetite remains weaker after a slew of data pointed to a U.S. slowdown,

“A narrowing in expected growth differentials is beginning to push the greenback toward the bottom of the ‘dollar smile’,” the chief market strategist said.

“The US’s combined roles–major economy, global safe haven, and recycling center for international capital–mean that the dollar tends to strengthen both when the US is growing more quickly than its global counterparts, but also, counter-intuitively, when it is growing much more slowly…. When growth rates converge–as they are now–bad economic news in the US becomes bad news for the dollar as money tends to flow out into global markets in pursuit of higher yields.”

But he cautioned that “the dollar could smile once again” on the return of “debt ceiling nonsense.”

The U.S. dollar has yet to peak, Spartan’s Peter Cardillo said, with monetary policy driving FX markets.

“The spread differential between [the US and] Europe and Japan is quite large and remains widening.”

He sees the Fed adding 75 basis points to the fed funds target rate over the next two FOMC meetings, tightening faster than its counterparts in the developed world.

“We can probably weather economic decline better than other countries and that means the dollar probably will have one more rise before a natural reversal sets in.”

Bonds:

Treasury yields were broadly higher early Friday.

The 10-year Treasury note yield bounced off a four-month low Thursday as a rally for bonds took a breather after data showed the U.S. labor market remains strong.

Fed Vice Chair Lael Brainard indicated she was supportive of slowing the pace of rate rises to a more traditional quarter percentage point at the central bank’s next policy meeting.

“We are seeing the shifting gears of tighter monetary policy having the desired effects,” New York Fed President John Williams said in a speech to bond market analysts in New York.

But, he added, “we still have a ways to go to get” the Fed’s policy rate “to the level that I think is sufficiently restrictive to achieve our goals.”

Fed Chair Jerome Powell’s “objective of cooling the jobs market has yet to be convincingly accomplished and as such, the Fed remains on track to hike on Feb. 1 and lay the groundwork for a move in March as well,” BMO Capital Markets said.

“A May move remains a wild card and it’s too soon to take a quarter-point at that junction completely off the table as the fed funds futures market appears content to at the moment,” BMO said.

The messaging from the first Fed policy meeting of the year will further refine investor expectations or where the fed-funds rate is likely to peak as well as for the timing of the first cut, BMO added.

Energy:

Oil prices rose in Asia, extending overnight gains as traders continued to look ahead to the upcoming EU ban on Russian oil products.

“We feel the recent strength in crude oil and, so far, a lack of selling in spot markets,” Tariq Zahir, managing member at Tyche Capital Advisors, said.

Prices are likely to move higher from here “with the reopening of China, the continued Ukraine situation, and the fact our government must buy crude oil to refill” the Strategic Petroleum Reserve.

“While China’s mobility data are inflecting positively, there is still possibly too much optimism over China’s demand profile built up in short-term analysts’ expectations,” said SPI Asset Management.

The first quarter of this year will be a “fragile period for commodities, with recession angst filling the airwave,” it said.

Nevertheless, the “observed sharp increase in crude imports to China and the significant decrease in product exports implies [that mainland China] is preparing for a substantial surge in demand, meaning a massive impact on global oil prices could happen in Q1,” it added.

Read: Oil demand could plunge by 30% over the next 5 years, Cathie Wood predicts.

Metals:

Gold prices were slightly higher in Asia, after prices climbed to their highest since April overnight amid indications of a slowdown in U.S. inflation.

“Gold will look even more attractive if the U.S. is viewed as likely having a recession in the second half of the year, which could mean earnings will contract far worse than markets are pricing,” Oanda said.

Technically overbought conditions for gold following its recent rise “hint that we could see a minor downside correction in the short run, but levels between $1,855 and $1,900 are interesting for amassing gold,” Swissquote Bank said.

“There is potential for a further rise in gold, especially if the stocks fall, while the U.S. yields continue easing,” it added.

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Aluminum gained on likely position adjustment ahead of the Lunar New Year holidays in Asia.

However, gains in the base metal may be curbed by concerns over a global economic slowdown.

Alcoa Corp. has warned that its aluminum shipments could be weaker than expected this year, owing to dwindling demand in Europe and China’s soft economic outlook, ANZ said.

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Chinese iron ore prices futures rose on hopes for demand out of China.

In its quarterly report, BHP, the world’s biggest miner, expressed optimism over the role which China will play in world commodity markets in the year ahead, noting the country’s pro-growth policies.

BHP’s CEO Mike Henry also said the miner expects China will exceed 1 billion metric tons of steel output for a fifth straight year.

TODAY’S TOP HEADLINES

Top Fed Officials See Progress on Inflation Fight

Two senior Federal Reserve officials said the central bank was making progress in its inflation fight, but it would take time to bring inflation back to the Fed’s 2% target.

Fed Vice Chair Lael Brainard indicated in remarks Thursday she was supportive of slowing the pace of rate rises to a more traditional quarter percentage point at the central bank’s next policy meeting, which is Jan. 31 to Feb. 1, joining a number of colleagues.

China’s Central Bank Keeps Benchmark Lending Rates Unchanged

China’s central bank on Friday kept its benchmark interest rates unchanged as the Chinese economy recovered from the country’s Covid reopening quicker than expected.

The People’s Bank of China kept the one-year loan prime rate at 3.65% and five-year LPR at 4.3%, both unchanged from last month.

Japan Core Inflation Hits 4% for First Time in Four Decades

TOKYO-Core consumer-price inflation in Japan reached a fresh 41-year high of 4% in December, adding to pressure on the Bank of Japan to unwind its decadelong monetary easing.

Although the BOJ stood pat on policy this week, the rise in inflation is likely to fuel market expectations that the central bank will abandon its policy of setting a cap on the 10-year government bond yield. It raised the cap to 0.5% in December.

U.K. Consumer Confidence Unexpectedly Deteriorated in January

U.K. consumer confidence unexpectedly took a dip in January after improving at year-end, highlighting persisting woes as high inflation and rising interest rates erode Britons’ purchasing power.

Research firm GfK said its consumer-confidence barometer declined to minus 45 in January from minus 42 in December, ending a string of three consecutive monthly increases. The reading misses economists’ expectations of a further improvement in sentiment to minus 40.

Russia’s Wagner Unit Claims Control of Ukrainian Town Near Bakhmut

KYIV, Ukraine-The leader of Wagner Group, the Russian paramilitary force, claimed that his soldiers had taken control of Klishchiivka, a town on the outskirts of the eastern Ukrainian city of Bakhmut.

“We can safely say that the settlement of Klishchiivka, which is one of the important suburbs of Bakhmut, has been completely taken under the control of Wagner,” Yevgeny Prigozhin, the founder of Wagner, said in an audio message released by the catering company he also owns.

Netflix Co-Founder Reed Hastings Transitions to Chairman Role, With Greg Peters Elevated as Co-CEO

Netflix Inc. said co-founder Reed Hastings has stepped down as co-chief executive and will become executive chairman, in a leadership shuffle that comes as the streaming giant beat its own forecast for subscriber gains.