MARKET WRAPS
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France flash estimate of job creation; Italy retail sales; trading updates from Siemens Energy, Deutsche Boerse, Societe Generale, TotalEnergies, Sberbank, AkzoNobel, Barratt Developments, Smurfit Kappa, ABN AMRO, Adyen, Pandora, Aker Solutions, Equinor, Ashmore Group, DCC, Severn Trent, British American Tobacco, Land Securities
Opening Call:
Shares look set to advance in Europe on Wednesday after remarks from U.S. Federal Reserve Chair Jerome Powell. In Asia, stock benchmarks were mixed; Treasury yields fell; the dollar weakened; oil was mixed; while gold gained.
Equities:
European stocks are poised for gains on Wednesday, tracking the overnight rise on Wall Street in the wake of Fed Chair Powell's comments that inflation will decline significantly in 2023 but more interest-rate hikes will be necessary.
The comments "do nothing to undermine the recent strength in the market, " said TradeStation. "They also seem to keep us on track for another 25 basis points in March, with possibly no more increases after that. It's a potential Goldilocks environment for the bulls and a very tough spot for the bears."
However, TradeStation said Powell's remarks mean he refrained from walking back his disinflation comment. "If anything, he reiterated it in a guarded way," which gives investors breathing room for the next few weeks as they wait for more economic data.
Other market analysts were concerned the noisy economic data has created an even greater divergence between market pricing on interest rates, and the Fed's expectations of how the economic and financial conditions are likely to evolve.
"The market has been almost contorting itself into a pretzel and trying to over-analyze his [Powell's] words," said Newton Investment Management. "The clear message is if we're going to make a mistake, we're going to move too slowly to reduce rates. We're not going to move too prematurely to raise rates."
Bets in fed-funds futures markets show that traders are still firmly convinced that another quarter-point interest-rate rise is the Fed's likely next move when U.S. central bankers convene in March, according to CME Group's tracker.
BRI Wealth Management expects higher borrowing costs and inflation to eat further into companies' profitability. Companies in the S&P 500 are expected to report that profit margins shrank by 8.7% in the fourth quarter compared with the prior year, according to estimates from Credit Suisse.
Forex:
The dollar softened in Asia, although there seems to be a mild risk-on mood.
Sentiment appears to be risk-on as Fed Chair Powell's allusion to "further hikes" was overlooked in favor of "dis-inflationary process," said Mizuho Bank.
Silicon Valley Bank said there is a lot of crosswinds in forex and elsewhere, as markets react to Powell's comments. There are signs of disinflation happening, but the fight is far from over and the strength of the economy can withstand more rate hikes, it said.
While there is still need to be vigilant about inflation, there could be another flare-up, and "the wild card this year is the reopening of China, " a commodity-hungry economy that represents a "big supply-side influx," it said further.
Bonds:
Treasury yields dropped after Fed Chair Powell's remarks weren't as hawkish as investors had feared.
"The key takeaway from Jay Powell's Washington Economics Club appearance is that Friday's strong employment report underscores the Fed's Wednesday message. That message, Powell says, is there is still a lot more work to do," said FHN Financial.
"Powell's communication is consistent with another quarter-point hike in March and plans for more after that," it said. "Of course, those plans will change if the economy unfolds differently than the Fed currently expects."
Sevens Report Research pointed out that the market no longer seems to be responding to what Fed's Powell is saying. Instead, it is responding to the underlying economic data, which are suggesting that the Fed may need to be even more aggressive if it hopes to drive inflation back to its 2% target.
While inflation has been waning for six months, wages are still rising and some on Wall Street are worried that this disinflation, which Powell cited during Wednesday's press conference, might turn out to be transitory.
Fed funds futures, which traders use to place bets on the direction of monetary policy, have also reflected expectations for more rate hikes this year, according to the CME's FedWatch tool.
Energy:
Oil prices were mixed, but were likely to be supported by Saudi Aramco's unexpected price increase.
The producer raised most prices for its flagship Arab Light grade, defying expectations of a cut, ANZ Research said. Aramco also signaled it expects demand to strengthen, especially in China, which is reopening after years of Covid-19-related restrictions, it added.
"The price of the barrel is finding support as the reopening of the Chinese economy, following the end of the zero-Covid policy, is expected to drive a significant increase in demand for crude this year," said ActivTrades.
"At the same time, the earthquake in Turkey forced the shutting down of a major export terminal, responsible for 1 million barrels per day, exacerbating supply side pressures and contributing to increases in oil prices.".
ActivTraders noted that gains for crude prices have come alongside a bounce for the U.S. dollar. Typically a stronger dollar is a negative for commodities priced in the unit, making them more expensive to users of other currencies.
Metals:
Gold prices rose after Fed's Powell refrained from pushing back against expectations the Fed would ease monetary policy this year, said Oanda.
However, risks of two or three more rate increases remain on the horizon, which should keep gold prices somewhat grounded, it added.
Near term, gold and silver are "likely to remain traders' markets, punctuated by spikes and troughs as consumers acclimatize to these higher levels and U.S. data either confirm or refute hopes for a turnaround in Fed policy," said BullionVault.
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Lead prices climbed on supply concerns.
The Shanghai Metals Market has reported that a primary lead smelter in China's Hunan province has been closed for maintenance this week, with operations scheduled to resume next week, said ING.
The output of primary lead from this smelter in February is estimated to fall by 2,000 tons, ING added, citing the SMM report.
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Chinese iron-ore futures were lower, as the investor-sentiment-led rally fueled by China's reopening is fading.
"With the recent ebb of market optimism, price of iron ore faces the risk of pullback in the short term," said CSC Financial. It remains neutral in the long-run, as fundamentals are strong while regulatory risks remain.
TODAY'S TOP HEADLINES
Joe Biden Touts Economic Gains in State of the Union
WASHINGTON-President Biden used his State of the Union address to try to sell Americans on his economic agenda and called for renewed bipartisanship, but his appeals for unity were punctuated by Republican lawmakers' loud objections to his remarks.
The annual speech, which was delivered in the House chamber before a joint session of the newly divided Congress on Tuesday, gave Mr. Biden, 80, a chance to test his message in front of a large audience weeks or months before he is expected to announce his reelection bid. Recent polls show a majority of Democratic voters don't want him to run for a second term, and his approval ratings remain low.
Fed's Jerome Powell Braces for Longer Inflation Fight Amid Hiring Surge
Federal Reserve Chair Jerome Powell said the labor market's surprising strength underscores why bringing inflation down will take longer and require higher interest rates than many investors have been anticipating.
A government report Friday that showed hiring accelerated in January was "certainly strong-stronger than anyone I know expected," Mr. Powell said Tuesday during a moderated discussion before the Economic Club of Washington, D.C. "It kind of shows you why we think this will be a process that takes a significant period of time."
European Officials Push for Joint Effort With U.S. on Green-Technology Minerals
WASHINGTON-Representatives of Europe's two top economies proposed new efforts with the U.S. to strengthen supply chains for critical minerals used in electric vehicles and other green-technology products, even as they continued to press the U.S. about its clean energy legislation.
Robert Habeck, German vice chancellor and minister for economic affairs and climate action, proposed Tuesday creating a "critical minerals club" with the U.S. during a trip to Washington where he met with Treasury Secretary Janet Yellen; Commerce Secretary Gina Raimondo; and Brian Deese, director of the White House National Economic Council, among others. Bruno Le Maire, French minister for finance, economy and industry, also attended the meetings.
VW Says 2022 Sales and Profit in Line With Forecasts
BERLIN-Volkswagen AG said Tuesday that 2022 sales and operating earnings were largely in line with forecasts, but that cash flow, a key measure for investors, fell short of expectations as supply-chain woes led to higher unsold inventory at the end of the year.
VW and other auto makers have struggled over the past year with continued disruptions to supply chains in the wake of the war in Ukraine and amid a resurgence in Covid-19 infections in China that hit supply chains, making it difficult to maintain production at constant levels.
Turkey, Syria Confront Earthquakes' Devastation-'I Buried My Kids Today'
BELEN, Turkey-As the sun went down Tuesday over Girne Street, dozens of people, their hands and arms limned with ghostly gray dust, silently combed the wreckage of flattened apartment blocks.
Ismail Parlak and his wife dug through the rubble looking for Mr. Parlak's mother, entombed, they said, somewhere under six stories of collapsed concrete and contorted metal.
(MORE TO FOLLOW) Dow Jones Newswires
02-08-23 0015ET
