MARKET WRAPS

Watch For:

E.U. flash estimate euro area inflation, EU summit concludes; U.K. GDP, Business investment, nationwide house price index; Germany unemployment, retail trade, foreign trade price indices; France PPI, CPI, OECD Government at a glance report launch; Italy unemployment; trading update from Sberbank

Opening Call:

Stock futures edged higher in Europe early Friday as investors continue to track economic data. In Asia, stock benchmarks were mixed; Treasury yields were little changed; the dollar weakened; while oil gained and gold declined.

Equities:

European stocks may track slightly higher at the open on Friday, with a U.S. inflation metric and eurozone inflation in focus after a strong U.S. GDP growth print tamped down recession fears. An updated estimate for first-quarter U.S. economic growth came in at 2%, stronger than previously reported.

Meanwhile, Federal Reserve Chair Jerome Powell reiterated the risks of "overdoing" or "underdoing" rate hikes still not in the balance theme in Madrid, Spain on Thursday after reinforcing his willingness to combat inflation with more aggressive monetary policy on Wednesday.

"Our base case is that the Federal Reserve is able to engineer a soft landing," said Carol Schleif, chief investment officer of BMO Family Office.

Another half-point of rate increases shouldn't derail stocks' rally through the first half of the year, according to Schleif.

Company earnings results for the second quarter-due in the coming weeks-will offer insight into how management teams navigated the March regional banking panic and how they have adjusted their outlooks, she said.

But some see the expanded breadth as a sign that market sentiment is peaking, a contrarian indicator that can flash just before stocks reverse course.

"I think that people are underestimating Powell's commitment to knocking inflation," said Phil Pecsok, chief investment officer of Anacapa Advisors.

The rampant pessimism at the end of last year appears to be flipping toward widespread bullishness, according to Pecsok.

"I'm going to be a little cautious over the next few weeks," Pecsok said.

"But the market could just as easily keep going higher, and we want to participate in that."

Friday's U.S. inflation data could add to a slew of economic data so far this week supporting the prospect of higher interest rates for longer.

Economists surveyed by WSJ expect May core PCE to keep April's 4.7% annual pace, while slowing slightly to 0.3% from 0.4% in the monthly reading.

Also due is eurozone inflation release. HSBC expects eurozone core CPI rate to jump to 5.7% from 5.3% while a poll of economists' by The WSJ expect the rate to rise 5.4%.

Forex:

The dollar weakened early Friday, as investors weigh strong U.S. economic data on the one hand and concerns of further Fed tightening on the other.

The economy is "too strong" and investors need to "watch out," Oanda said after Thurday's final 1Q GDP estimate, a robust 2% growth.

The data "reminded traders that the economy is far from breaking and probably will need to be subject to much more Fed tightening."

He added that currency markets were "aggressively pricing an end to Fed tightening after July," and are now revisiting that assumption.

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Meanwhile, the yen is weaker against most G-10 and Asian currencies early Friday after Tokyo June core CPI rose 3.2% on year, undershooting market expectations for a 3.4% rise.

The data has underwhelmed and should spur USD/JPY to rise toward 145, said Pepperstone.

However, if USD/JPY breaks above 145, market participants may hear of the BOJ/MOF 'checking rates' with Japanese FX desks, which should curb the currency pair's upside, it added.

Earlier today, Japan's Finance Minister said the forex market was being watched with a sense of urgency and appropriate action would be taken against excessive forex moves.

Bonds:

Treasury yields were little changed, after revised data showed the U.S. economy grew faster than previously reported during the first quarter.

"Despite rising borrowing costs, the latest read of housing market metrics suggests ongoing resilience," said Stifel, Nicolaus & Co., citing recent upticks in construction activity, sales, and prices.

"This suggests the Fed may have significantly more work to do before successfully tamping down activity and restraining the housing market enough to cool topline growth and by extension, tame inflation," it said.

Markets are pricing in an 89.3% chance of a quarter-of-a-percentage-point rate hike on July 26, which would lift the fed funds rate target to between 5.25%-5.5%, according to the CME FedWatch Tool.

They see a 25% chance of another move of that size in September, up from 16.4% a day earlier.

Energy:

Oil futures were slightly higher in Asia, but this week's hawkish comments by global central bank chiefs on the need to keep tightening monetary policy to bring down inflation could continue to cap gains.

Crude's price gains have been modest against a backdrop of "hawkish comments from the U.S. Fed as inflationary concerns continue," ING said. Higher interest rates can raise the potential for a recession, which may lead to lower energy demand.

On the supply side, OPEC+, which is made up of the Organization of the Petroleum Exporting Countries and its allies, is widely viewed as being "maxed out" in terms of its ability to further cut production quotas, so traders are focused on demand, Sevens Report Research said.

Analysts at Galaxy Futures expect oil to remain rangebound in the near term, citing limited catalysts to drive gains.

They point to prevailing pessimism over the interest rates outlook, as well as uncertainties in longer-term demand expectations, even though ongoing seasonal demand could offer temporary support to prices.

Metals:

Gold prices edged lower, capped by hawkish signals from central banks around the world and rising worries over a global economic recession.

With these unfavorable factors likely to drag on, the precious metal may face continued downward pressure in the near term, Galaxy Futures said.

It warned that buying interest was unlikely to pick up substantially against the backdrop of a strong dollar and persistently tight monetary policies.

Still, Peter Spina, president of https://urldefense.com/v3/__http://GoldSeek.com__;!!F0Stn7g!DJLtsqX3VP03b2il5tMsdH2OuN54Y_ofS2itUR7qLh_Bv6OZBU2b0JMs5rvwjNg9AQszumTJ8Qj95unRhGelKD89hsUWyD9oul1QXSxOgIQ$ said that gold may be "finishing off its pullback here," as the market is hitting or very close to seeing the "Summer doldrum lows" being established.

"We can expect gold to start drifting back higher and preparing itself for another attempt at record price highs as we move into the last two quarters of 2023," said Spina.

"This is the time to buy when sentiment has gone weak."

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Copper edged higher early Friday on possible position adjustment, but gains could be limited.

Commodity demand expectations were deteriorating quickly as optimism over a large-sized China stimulus package was fading, TD Securities said.

This decline was corroborating TD Securities' view that the stimulus-relief rally in copper was overdone.

However, Jefferies said that while the impact of declining copper demand from China's housing market has for years overshadowed demand growth for the metal related to the energy transition--"the pendulum has swung."

"Energy transition has become a bigger end market than China property" and its growth should now exceed the decline in demand from China's housing market, it said.

Moreover, the gap between the two should widen "as energy transition grows from a larger base and China housing declines from a smaller base, " Jefferies added.

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Iron-ore futures were higher in China trade, extending a recent rally as steel production peak seasonality in China boosts buying interest for the steel-making ore.

But analysts at GF Securities advised investors against chasing the upturn.

They point out that seasonal steel production is slowing down, and iron ore demand will likely ease in the coming months.

"Given a high level of previous rebound, upside room is likely limited," they said.


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06-30-23 0016ET