MARKET WRAPS
Watch For:
EU euro area balance of payments, accounts of last monetary policy discussions; Italy balance of payments; UK consumer confidence survey, Bank of England credit conditions survey and bank liabilities survey; OECD quarterly labor market situation, harmonized unemployment rates; trading updates from Alstom, Deliveroo, Harbour Energy, Sage Group, Melrose Industries
Opening Call:
Shares in Europe could be off to a weak start after a fresh batch of U.S. data offered mixed signs of how the economy is weathering the Federal Reserve's tightening campaign. In Asia, stock benchmarks were mixed; Treasury yields fell; the dollar weakened; oil dropped, while gold gained.
Equities:
European stocks could venture into negative territory, tracking Wall Street's retreat after falling retail sales in the holiday shopping season raised concerns that consumer spending and economic growth are losing momentum as the Fed raises interest rates.
Pence Capital Management said the U.S. economy is seeing the continued effect of the rise in the federal funds rate. "September's rise (in federal funds rate) is now beginning to show up and then you'll begin to see November's rise show up over the next couple of months."
"This was good news for the Fed," said Commonwealth Financial Network. "The slowdown in demand and slowing producer inflation toward year-end is a positive sign that the Fed's more restrictive monetary policy is having a real impact in combating inflation."
However, despite positive news on the inflation front and the likelihood of a slower pace of interest-rate increases, investors grew increasingly worried about recession risk. It remains to be seen if the Fed's rate increases will throw the economy into a deep downturn, especially as the effects of tighter policy have yet to fully filter into the economy.
Investors are also focusing on the next batch of U.S. fourth-quarter corporate earnings reports. So far, with 33 of the S&P 500 having reported, 67% of those have beaten profit forecasts, according to Refinitiv. However, there have been high-profile disappointments, such as Goldman Sachs.
Forex:
The dollar lost ground in Asia amid a risk-off mood.
The deterioration of U.S. retail sales and industrial production data have hurt risk sentiment, said Saxo Markets, noting the overnight tumble in U.S. stock markets.
TS Lombard said it is time to bet on a falling dollar because the Fed looks likely to cut interest rates before the year-end while the ECB keeps tightening monetary policy.
TS Lombard expects decelerating inflation will lead the Fed to end the tightening cycle shy of 5%, with a quarter-point rate hike in February possibly its last of the cycle. It sees rate cuts under way by midyear as the market moves to price in a recession, which would put downward pressure on Treasury yields.
The ECB, meanwhile, is likely to stick to an aggressive series of rate increases indicated at its December policy meeting.
TS Lombard added a caveat, however.
"There does seem to be a limit on how tight the market thinks the ECB can get: the higher the ECB terminal rate priced in by the market, the more the market prices in cuts," it said. And since a U.S. recession would make an EU recession worse, the ECB would likely have to follow the Fed in cutting rates at some point.
Bonds:
Treasury yields fell after data showed U.S. retail sales sank more than expected last month and a measure of wholesale prices declined.
The figures underlined already strong investor expectations the Fed will downshift the size of rate increases to 25 basis points, when it concludes its next policy meeting on Feb. 1.
Markets are pricing in a better than 95% probability that the Fed will raise its policy interest rate by 25 basis points to a range of 4.50% to 4.75% on Feb. 1, according to the CME FedWatch tool.
The central bank is expected to take its fed-funds rate target to 4.9% by June 2023, according to 30-day Fed Funds futures.
Energy:
Oil prices weakened in Asia, after posting their first loss in nine sessions overnight.
The release of weak economic data in the U.S. raised demand concerns, ANZ said. "This raised the specter of a recession, with risk appetite suffering as a consequence."
Comments by St. Louis Fed President James Bullard suggested that despite cooling inflation data and soft retail sales, the Fed still needs to move quickly to get benchmark interest rates above 5%, said The Price Futures Group.
That "raised fears that the Fed may raise rates at the 50 basis point clip again," it said.
Traders have been concerned that aggressive U.S. rate hikes could lead to a recession and lower energy demand.
Meanwhile, "the return of China's consumption engines is enormous for the oil market outlook," said SPI Asset Management. "While the industrial engine is revving up, guzzling down oil products, consumers will soon catch up at the petrol pump."
Crucially, the accumulation of household savings is "massive, and has risen fast over the past three years," it said. "Ultimately, when Chinese consumers start spending, it will boost oil prices."
Metals:
Gold prices rose early Thursday, as investors digested the fresh batch of U.S. economic data.
The data supported the gold price as "traders believe that the Fed is unlikely to adopt a hawkish policy in the face of a weak economy," said AvaTrade.
Prices have softened but are still holding on to the $1,900 level, said Oanda.
The end of Fed tightening is approaching, but a shallow recession might not be supportive of inflows for gold as that might lead to a stronger dollar, it said.
"Gold's rally looks like it will take a break here, but it could resume if yields continue to slide."
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Copper fell in a likely technical correction following its recent rally. However, losses may be limited by continued optimism toward China's reopening.
Chinese Vice Premier Liu He told the World Economic Forum's annual meeting this week that China's pandemic prevention and control optimization has been smooth, and the economy will probably recover to pre-Covid levels this year, ING said.
The three-month LME copper contract is 0.8% lower at $9,253.00 a ton.
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Chinese iron-ore prices rose amid continued optimism over China's reopening.
Citi Research is bullish on iron ore in the near term, as it has been and will probably remain the China reopening trade.
However, the country's weak property sector compared with historical activity levels is a concern, unless and until major fiscal and monetary stimulus were to happen, it said.
TODAY'S TOP HEADLINES
Fed's Beige Book Says Businesses Expect Weak Growth in Months Ahead
U.S. economic activity was relatively flat at the start of the year and businesses are pessimistic about growth in the months ahead, the Federal Reserve said in a Wednesday report.
Half of the Fed's 12 regional banks reported no change or slight declines in economic activity in their districts, with several others reporting slight or modest growth and one saying it had a significant decline.
Treasury Rally Intensifies After Signs of Slowing Growth
The 2023 rally in U.S. Treasurys picked up new momentum on Wednesday after the Bank of Japan maintained its cap on bond yields while new data pointed to a further slowdown in U.S. inflation and economic activity.
The yield on the benchmark 10-year U.S. Treasury note settled at 3.374%, according to Tradeweb, down from 3.534% Tuesday and marking its lowest close since early September.
Two Fed Officials Back Quarter-Point Rate Rise Next Month
NEWARK, Del.-Two Federal Reserve officials said they would favor raising interest rates at the central bank's next meeting by a quarter percentage point, further slowing the pace of increases.
The Fed raised rates by a half point at its meeting last month, stepping down the pace after four consecutive increases of 0.75 point aimed at combating high inflation. Dallas Fed President Lorie Logan said Wednesday she supported that decision "and the same considerations suggest slowing the pace further at the upcoming meeting" on Jan. 31-Feb. 1.
German Chancellor Praises Ukraine's Resistance, Warns Against Economic Protectionism
Russia has failed to reach its goals in Ukraine, and the invasion has made the West more resilient and accelerated the decarbonization of its economies, German Chancellor Olaf Scholz said at the World Economic Forum in Davos, Switzerland.
Almost a year after the start of Russia's invasion, Mr. Scholz struck a positive note as he commended Kyiv's successful resistance, helped by Western military assistance, and described how Germany and its partners had buttressed their economies and become independent of Russian energy supplies.
BHP Second-Quarter Output Mostly Higher, Cautions on Costs
BHP Group Ltd. on Thursday reported a sharp increase in second-quarter production of steelmaking coal and copper, as well as a small lift in iron-ore output.
The world's largest miner by market value said it continued to grapple with cost pressures, however, raising full-year cost expectations for its coal-mining operations.
Amazon Cited by Labor Department for Hazards at Three Warehouses
Federal authorities have cited Amazon.com Inc. for safety violations at three of its warehouses.
The U.S. Department of Labor's Occupational Safety and Health Administration said Wednesday it had issued citations to the company after inspections at facilities in Florida, Illinois and New York.
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Expected Major Events for Thursday
00:01/UK: Dec RICS Residential Market Survey
05:30/NED: Dec Unemployment
07:00/NOR: 4Q Business tendency survey
07:30/SWI: Dec PPI
07:30/SWI: Dec Import Price Index
08:00/SPN: Nov Trade Balance
09:00/EU: Nov Euro area balance of payments
09:00/NOR: Norges Bank monetary policy decision
09:30/UK: 4Q Bank of England Credit Conditions Survey
(MORE TO FOLLOW) Dow Jones Newswires
01-19-23 0015ET
