EMEA Morning Briefing : Cautious Start Seen for Stocks; U.S. Bank Earnings to Kick Off

MARKET WRAPS

Watch For:

EU industrial production, trade; Germany annual GDP; France CPI; UK industrial production, trade, index of services, GDP monthly estimates; trading updates from Sberbank, Taylor Wimpey

Opening Call:

Stock futures point to slight declines in Europe on Friday. In Asia, stock benchmarks were mixed; Treasury yields were mostly higher; the dollar gained; oil slipped and gold advanced.

Equities:

European stocks may face a muted open on Friday, after rallying in closing trade the previous day on softer U.S. December CPI data.

The latest U.S. inflation report showed cooling price pressures for the sixth consecutive month, likely keeping the Federal Reserve on track to slow its pace of interest-rate increases.

However, market analysts said some traders had been hoping to see a more significant decline, after inflation came in lower than economists had expected during the prior two months.

"The release is a little underwhelming," said Principal Asset Management. "Not only are the numbers exactly in line with consensus expectations, but they don't really clear up the 25bps vs 50bps question for the Fed's February meeting and add nothing to the late-2023 Fed pivot debate either."

Wall Street widely expects the central bank to raise its benchmark rate target by a quarter of a percentage point to a range between 4.5% and 4.75% on Feb. 1.

Exencial Wealth Advisors contends that the stock market over the past week has anticipated the slowdown in inflation and investors have been right to start the market on a positive note so far in 2023.

However, there are "enough problems" to keep inflation elevated for "several more quarters" as investors deal with "distortions" in different parts of the economy.

Forex:

The dollar climbed after U.S. inflation eased for the sixth straight month.

"This inflation report supports the idea that the Fed could be close to done with raising rates soon and that the U.S. economy might avoid or see only a shallow recession," Oanda said. "Fed members are clearly signaling a smaller tightening pace going forward."

Markets are now pricing in a 93.2% chance of a quarter-point rate increase at the Feb. 1 FOMC meeting, up sharply from 76.7% yesterday and 35.1% a month ago.

Meanwhile, a strong performance in eurozone equities is likely a large reason for the euro's recent gains, ING said.

The euro has shown some independent strength, rising strongly against European currencies, particularly the Swiss franc, ING said.

"We are still seeing eurozone equity outperformance, which must be providing the euro with some good support," it said.

Bonds:

Treasury yields were mixed, after the eagerly awaited U.S. CPI reading showed inflation continued to slow, in line with expectations.

"The 3-month annualized core CPI is down to 3.1% and at least another 1% lower if using new leases versus existing leases that have a six to twelve month lag. We continue to expect the Fed to only raise rates two more times as CPI continues to moderate," said Sit Investment Associates.

"The market does not believe the Fed's insistence that they will actually go above 5% and stay there for an extended period. This is best reflected in the U.S. 2-year yield,...which is as low as it's been since early October '22, many Fed rate increases ago," Navellier & Associates said.

Energy:

Crude-oil prices slipped in Asia after gains the previous session, when the release of softer U.S. inflation data led to a decline in the U.S. dollar, which helped lift the dollar-denominated prices of oil.

Crude oil is likely to be up for the week, Saxo said. The risk-on tone for the commodity is due to China's steady commitment to reopen its economy and Chinese buyers becoming more active in the physical market after import quotas were increased, it added.

"A number of signs, including an increase in crude oil import quotas, suggest a recovery in Chinese oil demand this year," said ING.

"Although the big uncertainty remains just how big a recovery we will actually see. In our balance sheet, we assume that China will make up 50% of the 1.7 million barrels a day of global demand growth expected this year."

Metals:

Gold prices were a tad higher in Asia, slightly extending gains following the release of U.S. CPI data.

The data raised expectations for slower Fed rate hikes and pressured the U.S. dollar, providing support for precious metals.

However, given that gold prices have been climbing steadily since November, they could run out of momentum in the short-term, Oanda said. Oanda thinks that gold will need to have a daily close above $1,900 to move even higher.

The three most significant factors contributing to gold's price strength so far this year are "China buying," U.S. dollar weakness, and falling U.S. Treasury yields, said Sprott Asset Management.

Despite gold's climb, however, Wolfpack Capital believes prices for the metal "does not have much further room to run before profit taking stalls the recent momentum, in particular, if a risk-on trade returns."

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Aluminum rose amid buying activity in Shanghai, said TD Securities.

The brokerage's tracking of positions in the market point to substantial short-covering activity, as traders square their books ahead of the upcoming Lunar New Year holiday, it said.

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Iron ore climbed amid improved risk sentiment.

The markets have been buoyed by prospects of a jump in China's industrial activity, said ANZ Research.

A slowing in the Fed's rate increases could also lead to economic growth across developed countries holding up better than previously anticipated, ANZ added.

TODAY'S TOP HEADLINES

The Markets Are Locked in a Game of Chicken With the Fed

The Federal Reserve says it is too early to think about cutting interest rates this year. Investors are growing more convinced that is exactly what the central bank is going to do.

The clash between investors' hopes and Fed policy, and how it ultimately resolves, is shaping up to be one of the biggest question marks for financial markets in 2023.

Fed Must Remain on Guard on Inflation, James Bullard Says

Inflation is moderating in response to the Federal Reserve's aggressive rate hikes of 2022, but the central bank must continue to guard against the risk that price increases stay high or reaccelerate, Federal Reserve Bank of St. Louis President James Bullard said.

The policy maker also said the market is probably too optimistic about inflation, speaking at an economic forecast forum Thursday.

Saudi Arabia Seeks to Lure Global Miners in Bid to Overhaul Its Economy

RIYADH, Saudi Arabia-Saudi officials are wooing top mining companies to help exploit untapped mineral deposits in the kingdom that could be worth hundreds of billions of dollars, as the world's biggest exporter of oil accelerates plans to build new industries away from hydrocarbons.

The fourth-largest net importer of minerals globally has a small domestic mining industry despite unverified estimates putting its mineral wealth at over $1.3 trillion, including deposits of copper, zinc, phosphates, uranium and gold. The results of a new survey are expected by 2027.

Rare Earth Find in Sweden Lifts Hope for Shift Toward Clean Energy

KIRUNA, Sweden-The discovery here of a large deposit of rare earth elements, vital for renewable energy and electric vehicles, offers fresh hopes for Europe's transition away from fossil fuels and a lessened reliance on China, the world's top supplier of the critical minerals.

Announcing potentially the largest known find in Europe, Swedish state-owned mining company LKAB said Thursday that some of the rare earth elements in the deposit could be used to produce permanent magnets, which are components in motors for electric vehicles and wind turbines. The company said the rare earth elements could be produced as a byproduct of mining iron ore.

Apple CEO Tim Cook to Take a 40% Pay Cut This Year

Apple Inc. Chief Executive Tim Cook has asked for a big cut in compensation this year.

Mr. Cook's total compensation target for 2023 will be $49 million, the company said in a Thursday filing. It said that is more than 40% lower than his target compensation of 2022.

Google Says Supreme Court Ruling Could Potentially Upend the Internet

WASHINGTON-A case before the Supreme Court challenging the liability shield protecting websites such as YouTube and Facebook could "upend the internet," resulting in both widespread censorship and a proliferation of offensive content, Google said in a court filing Thursday.

In a new brief filed with the high court, Google said that scaling back liability protections could lead internet giants to block more potentially offensive content-including controversial political speech-while also leading smaller websites to drop their filters to avoid liability that can arise from efforts to screen content.

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Expected Major Events for Friday

06:00/FIN: Dec CPI

06:00/FIN: Nov Retail sales

07:00/ROM: Nov Industrial production

07:00/ROM: Dec CPI

07:00/UK: Nov UK trade

07:00/UK: Nov Index of production

07:00/UK: Nov Index of services

07:00/SWE: Dec CPI

07:00/UK: Nov Monthly GDP estimates

07:30/HUN: Dec CPI

07:45/FRA: Dec CPI

08:00/SVK: Dec CPI

08:00/SVK: Dec Core & net inflation development

08:00/SPN: Dec CPI

09:00/ITA: Nov Industrial Production

09:00/BUL: Oct Trade with EU Member States - preliminary data

09:00/BUL: Nov Trade with third countries - preliminary data

09:00/CZE: Nov Monthly Balance of Payments

09:00/GER: Annual Annual GDP - first provisional calculation

09:00/POL: Dec CPI

10:00/EU: Nov Industrial Production

10:00/EU: Nov Foreign trade

11:00/IRL: Dec Irish Live Register latest monthly figures

12:30/UK: Dec NIESR Monthly GDP Tracker

13:00/POL: Nov Balance of payments

15:59/UKR: Nov Trade

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01-13-23 0030ET