EMEA Morning Briefing : Shares Could Slip Into Red on Fading Hopes of Rate Cuts

MARKET WRAPS

Watch For:

EU euro area balance of payments; Germany PPI; France new home sales, CPI; Italy balance of payments; UK retail sales; trading updates from Air France-KLM, Allianz, Mercedes-Benz, Hermes, EDF, Sika, NatWest, Safran, Swiss Re, MTN Group

Opening Call:

Shares in Europe seem headed into negative territory on Friday, as hopes fade that central bankers might cut rates soon. In Asia, stock benchmarks fell; Treasury yields mostly rose; the dollar gained; while oil and gold declined.

Equities:

European stocks could start in the red on Friday after U.S. inflation and jobs data came in better than expected, increasing concerns that the end of the Federal Reserve's tightening campaign is nowhere near.

"It is increasingly difficult to see a significant U.S. recession on the horizon," said Barings. "Much of the labor market continues to be white hot."

Recent economic prints served as a reminder that tamping down pricing pressures won't be straightforward. Wagers on where the benchmark interest rate would peak were revised higher, and hopes have faded that central bankers might cut rates soon.

"It's certainly possible that inflation will be stuck above 4% as the year ends," said Barings. "The Fed may not need to raise rates much more than currently expected, but it may not be able to cut until well into next year."

Wilshire said that despite recent recalibrations, there is less uncertainty surrounding the path of Fed policy and inflation. That has encouragingly led volatility to fall across markets, it said. "Investors don't need to brace for knee-jerk corrections in the stock market as much as last year. "

Forex:

The dollar gained ground in Asia on prospects for aggressive Fed tightening that would enhance the appeal of U.S. fixed-income assets and boost demand for the greenback.

St. Louis Fed President Bullard and Cleveland Fed President Mester appear open to stepping up rate increases to 50 basis points at the FOMC's March meeting, said DBS Group Research.

Also, firmer U.S. PPI figures released overnight affirmed that disinflation lost some momentum in January, it added.

However, the dollar's recent gains following strong U.S. economic data are unlikely to last, HSBC Global Research said.

While robust U.S. data in February have lifted interest rate expectations for the Fed, supporting the dollar, the data also allay fears of weaker global growth, it said.

The faster global growth bottoms out, the faster risk appetite can recover, which is negative for the dollar as a safe haven, it said.

The relationship between foreign exchange and risk appetite generally remains stronger than those with rates, it added. "This suggests better risk appetite is likely to win out in driving the USD lower."

Bonds:

Treasury yields broadly advanced after the producer-price index reading showed supplier prices increased more than expected last month.

"Hot PPI data and hawkish Fed speak helped send the 10-year Treasury yield to the highest level this year," Oanda said.

It said Cleveland Fed President Loretta Mester "helped send Treasury yields higher after saying she saw a 'compelling' case for a half-point rate rise at the last FOMC meeting.... The market should not expect the Fed to stay on cruise control with quarter point hikes."

Traders see an 82% likelihood of a quarter-point rate hike next month and expect additional quarter-point hikes in both May and June.

Still, they are factoring in an 18% chance of a bigger, half-point Fed rate hike on March 22, which would take the fed funds rate to between 5% and 5.25%, according to the CME FedWatch Tool.

"I now see the Fed's most likely path forward as a quarter percentage point rate hike at each of their next three decisions, in March, May, and June, taking the Fed's target to a peak of 5.25%-to-5.50% by mid-year. The Fed is likely to hold the federal funds rate unchanged at that level through December," said Bill Adams, chief economist for Comerica Bank.

Energy:

Oil dropped amid negative sentiment. There appear to have been risk-off-related trades that have pushed crude oil prices lower, CMC Markets said.

These trades have come in the wake of Wall Street losses overnight, following stronger-than-expected U.S. PPI data and USD strength, it added.

Still, Russia's 500,000 barrel per day oil production cut beginning in March and ongoing optimism about recovering demand out of China "remain supportive of prices, leaving oil futures largely rangebound between support in the low $70s and resistance in the low $80s," Sevens Report said.

The "primary risk to oil prices remains to the downside as recession warnings from the Treasury market point to a potential collapse in consumer demand in the coming months or quarters," it said.

Metals:

Gold edged lower on a strong U.S. dollar, which tends to move inversely with gold prices.

The short-term strength of the greenback could drag the precious metal lower slightly, but the outlook should be for higher gold prices by end-2023, said Oanda.

Gold might consolidate until traders see how high markets want to price in the Fed's peak rate, it added.

"The reality is that gold prices will continue to fluctuate around data releases (jobs, inflation, growth, etc.) as investors continue to look for clues around the [Federal Reserve's] policy decisions and the possibility of a recession," said RBC Capital Markets.

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Aluminum rose on possible buying by commodity trading advisors.

Prices of the metal are hovering just above levels that would be consistent with a sustained downtrend on the horizon, said TD Securities.

Although pressure appears to be on the downside, modest buying by CTAs could emerge, it added.

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Chinese iron-ore futures were higher, rising for a fourth consecutive session as hot-metal production has recovered while inventories at steel mills remain low.

However, negative factors are mounting given steel mills' lower profits and an estimated higher iron-ore supply in the coming two months, Donghai futures said.

TODAY'S TOP HEADLINES

U.S. Households Lifting Economy After Being Stung by Inflation Last Year

Fresh figures on jobs and prices drove the economy's surprising vigor this year, joining rising household incomes, consumer resilience and other data that have persuaded investors the Federal Reserve's battle against inflation is likely to be a longer one than they hoped.

Layoffs remained historically low last week while supplier prices increased in the year through January by 6%, faster than expected but down from 6.5% in December, the Labor Department said Thursday.

Privacy Regulators Step Up Oversight of AI Use in Europe

European privacy regulators are intensifying their scrutiny of companies' use of artificial intelligence, hiring experts and opening new units to crack down on data violations.

Companies' increased uptake of AI for a variety of applications, ranging from automated human-resources processes to retail chatbots and fraud-prevention technologies, are driving regulators to beef up their abilities to investigate potential violations of the European Union's General Data Protection Regulation.

NATO Pledges Earthquake Aid to Turkey

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The North Atlantic Treaty Organization, of which Turkey is a member, is airlifting tens of thousands of tents to Turkey in the coming days and weeks, Mr. Stoltenberg said in a joint news conference with Turkish Foreign Minister Mevlut Cavusoglu.

Nestlé Sells Less After Raising Prices, Moves to Drop Some Unpopular Lines

Nestlé SA reported a fall in sales volumes for the fourth quarter as the maker of Nescafé coffee and Purina pet food raised prices to offset soaring costs and halted sales of some less popular products.

The Swiss packaged-foods giant said Thursday that sales volumes fell 2.6% in the last three months of 2022, with prices rising by an average of 10.1%. Organic growth for the quarter was 7.5%, below analysts' expectations.

YouTube CEO Susan Wojcicki Is Stepping Down After Nearly a Decade in the Role

Susan Wojcicki, the chief executive of YouTube, said she is stepping down after nearly a decade in the role.

Ms. Wojcicki said in a blog post Thursday that she plans to focus on her family, health and personal projects. She'll also have an advisory role at Google and Alphabet Inc., which owns YouTube.

Microsoft Defends New Bing, Says AI Chatbot Upgrade Is Work in Progress

Just over a week after Microsoft Corp. unveiled its new Bing search engine powered by the technology behind the buzzy ChatGPT artificial-intelligence chatbot, early testers are calling out mistakes and disturbing responses generated by the technology.

Microsoft said that the search engine is still a work in progress, describing the past week as a learning experience that is helping it test and improve the new Bing. So far, only a select set of people have been given access to it. The company said in a blog post late Wednesday that the Bing upgrade is "not a replacement or substitute for the search engine, rather a tool to better understand and make sense of the world."

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Expected Major Events for Friday

07:00/UK: Jan UK monthly retail sales figures

07:00/GER: Jan PPI

07:00/SWE: Jan Labour Force Survey

07:30/SWI: 4Q Industrial Production

07:45/FRA: 4Q New home sales

07:45/FRA: Jan CPI

09:00/BUL: 4Q Labour force survey

09:00/EU: Dec Euro area balance of payments

10:00/ITA: Dec Balance of Payments

11:00/POR: Jan PPI

17:59/POR: Dec Balance of Payments

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02-17-23 0015ET