MARKET WRAPS
Watch For:
Unemployment rate for EU, Italy; Germany industrial production index; France balance of payments, foreign trade; no major corporate updates expected
Opening Call:
Shares are set to advance in Europe on Monday, tracking the jump in U.S. stocks following the monthly jobs report. In Asia, stock benchmarks climbed; the dollar dropped; while oil and gold gained.
Equities:
European stocks are poised to extend gains on Monday after disinflationary U.S. economic data sparked hopes of an easing in U.S. rates.
"Stocks are unfazed by signs of weakness in the U.S. economy following the ISM report and a drop in month-on-month U.S. job creation," IG said.
Even if the Federal Reserve's battle to bring down high inflation is not yet done, "I think people are saying, 'well, maybe inflation is continuing to come down,'" said Bob Doll, chief investment officer at Crossmark Global Investments. "It takes as little pressure off the Fed. That's good news."
However, "this is not going to push the Fed off its agenda one iota," said Hirtle, Callaghan & Co.
Numerous Fed officials have made clear that they want to see unemployment climb in order to help suppress inflation and engineer a return to the Fed's 2% target. Senior Fed officials expect unemployment to rise by nearly a percentage point in 2023, according to projections released in December.
Eugenio Aleman, chief economist at Raymond James, said he expects a "shallow" recession to begin in the second quarter, and that the Fed might pause its rate hikes after potentially hiking by 25 basis points at each of its next two meetings.
Forex:
The dollar slipped in Asia amid risk appetite, as nonfarm payroll data showed wage growth flagging even as the economy added more jobs than expected.
Supportive macro data in recent days have given risk sentiment a boost, said RBC Capital Markets. Also, Asian currencies have been on a tear since the start of the new year amid growing optimism from China's reopening, it added.
"The labor market continues to impress," Oanda said. "Wall Street is liking this NFP report as hiring continues, the labor force is growing, and wage pressures are coming down."
Oanda also said "the Fed will stay on their tightening course but risks of more hikes in the spring are easing as optimism is growing that wage pressures will continue to drop."
Bonds:
The U.S. jobs report showing decelerating wage growth fueled investor optimism regarding further rate increases.
Navellier & Co., however, pointed out that although the payroll report was well received by financial markets, also in the mix is the ISM service index falling to 49.6, the first time in two and a half years it has been below 50, which signals a contraction.
Combined with a contraction in manufacturing, per ISM Wednesday, "that means we're teetering on a recession," it said.
Traders priced in a more-than-50% chance of smaller-than-usual, quarter-of-a-percentage-point rate hikes by the Fed in February and March. They see a 74% probability of such a move in February and 66% chance of another in March, which would bring the fed-funds rate target to 4.75% to 5%, according to the CME FedWatch tool. Traders also boosted the chances of rate cuts toward the end of the year.
Meanwhile, European high-yield credit is expected to record positive returns in fiscal year 2023 after a negative return of 11.48% in fiscal year 2022, said ING.
The market faces uncertainty due to the challenging economic environment and some optimism "that the end of the current sharp monetary tightening cycle may be getting closer," it said. European high-yield return "should be positive in 2023, somewhere in the single digits," it added.
Energy:
Crude oil futures were higher in Asia after China's easing of border restrictions took effect Sunday.
The upside for oil is clear as it has reached a point where China's growth prospects have become more "meaningfully positive," which should benefit demand, said SPI Asset Management.
For now, "Chinese reopening flights and broader economic and social activity continues to be the biggest bullish risk" for oil, said Troy Vincent, senior market analyst at DTN. Even so, "there remains significant uncertainty around the timing and scale of normalizing activity levels."
The oil market will tighten noticeably from midyear at the latest, Commerzbank said.
The development of U.S. crude output has disappointed, with prospects repeatedly downgraded in the second half of the year, it noted, with the pre-Covid production high unlikely to be seen by the end of this year.
If the Energy Information Administration's outlook shows the prospect for production growth in 2024 remains subdued, the market is likely to tighten further, Commerzbank said.
Metals:
Gold prices rose in Asia amid expectations the Fed might ease up on policy tightening, which is viewed as supportive of the precious metal.
The release of the latest nonfarm payroll report showed wages are cooling, backing the idea that the U.S. central bank is almost done raising rates, Oanda said.
Investors are likely to continue to keep a watch for further signs that inflation is continuing to cool, further underpinning policy easing hopes, Oanda added.
---
Copper gained on positive market sentiment after U.S. data showed a slowdown in wage growth, signaling less incentive for the Fed to raise rates aggressively to combat inflation.
Risk sentiment has risen recently along with an increasing possibility of a soft landing in the U.S., said TD Securities.
The expected improvement in economic conditions in China following Beijing's policy changes have also lifted copper, it added.
---
Iron ore slid in Asia after a report that China's National Development and Reform Commission will step up efforts to clamp down on speculation of the ferrous metal as well as to regulate iron-ore prices.
The state planner reportedly issued a statement last Friday that it is very worried about iron ore price fluctuations.
TODAY'S TOP HEADLINES
Wall Street Sets Low Bar for Corporate Earnings Season
The stock market faces its next big test this week with the kickoff of a corporate earnings season that is expected to be dominated by worries about inflation and the health of the economy.
Analysts expect companies in the S&P 500 to report their first year-over-year decline in quarterly earnings since the height of the Covid-19 pandemic in 2020, according to FactSet. Fourth-quarter profits are projected to have dropped 4.1%, a sharp reversal from the more than 31% growth logged a year earlier.
Last Year Investing Seemed Easy. Not Anymore.
Sometimes investing seems easy. Not the business of actually making money-that is always hard. But there are times when the market makes it easy to have a strong view and decide where to put money.
Bonds Open 2023 With a Rally
U.S. Treasurys are off to a solid start in 2023, providing a glimmer of hope to investors recovering from a historically terrible year for bonds.
Treasury yields, which fall when bond prices rise, logged sizable declines in the first week of the year. The moves were aided first by encouraging inflation readings in Europe, and then by separate U.S. economic reports on Friday that showed a smaller-than-expected increase in average hourly earnings for workers and a surprisingly soft reading on service-sector activity.
Tech Industry Reversal Intensifies With New Rounds of Layoffs
A new wave of tech layoffs signals how executives in the industry are pivoting from a growth-above-all mindset to protecting their bottom line.
After a bruising 2022 in which companies from small startups to tech giants slammed the brakes on expansion, some of the biggest names in the sector are demonstrating that an era of austerity is only beginning, with expenses scrutinized and moonshot projects abandoned. Amazon.com Inc. and Salesforce Inc. both announced plans for layoffs in the past week.
Sweden Can't Meet Turkey's Demands on NATO Expansion, Prime Minister Says
ISTANBUL-Sweden's prime minister said Sunday that his country can't meet some of the demands made by Turkey in order for the Nordic nation to enter the North Atlantic Treaty Organization.
"Turkey both confirms that we did what we said we would do, but they also say they want things we can't and don't want to give them," said Prime Minister Ulf Kristersson, speaking at a security conference in Sälen, Sweden.
Egyptians Cut Back on Staples as Inflation Rises
As food inflation in Egypt climbed to 30% in November, the government suggested a new way to cut back: eat chicken feet.
"Good for the body and the budget," said the National Nutrition Institute in a December Facebook post.
Russia's Cease-Fire in Ukraine Ends With Few Signs Fighting Abated
Russia's self-declared 36-hour cease-fire expired with little letup in the fighting on Sunday morning, as Russian forces continued shelling across eastern Ukraine and Moscow-installed officials accused Ukrainian forces of bombing a power plant in occupied Donetsk.
The cease-fire, which Russian President Vladimir Putin said would last from noon on Friday to midnight on Saturday, when the Russian Orthodox Church celebrated Christmas, brought little slowdown in the fighting. Ukraine dismissed the call to put down weapons as a ploy and refused to participate.
SpaceX Aims to Increase Launches as Rivals Prep New Rockets
SpaceX is pushing to increase its flight rate this year as competitors work to debut new vehicles for the launch market.
The rocket-and-satellite company Elon Musk leads is aiming to conduct up to 100 orbital flights in 2023, Mr. Musk said in a tweet last August. That would represent a 64% jump compared with the 61 missions the company handled last year-itself the top number among private and government rocket launchers around the world, according to a new report from astrophysicist Jonathan McDowell, who tracks global space flight.
(MORE TO FOLLOW) Dow Jones Newswires
01-09-23 0019ET
