MARKET WRAPS

Stocks:

European stocks were lower Tuesday ahead of a speech from Jerome Powell on central bank independence, which investors hope will shed some light on the trajectory of U.S. monetary policy.

On Monday, two Federal Reserve policymakers made hawkish remarks saying interest rates would need to rise above 5%, higher than markets are currently pricing in, and remain there for some time in order to curb inflation.

The divergence between what Fed policymakers are saying and what the market is pricing is currently driving the narrative so far this year, with the focus this week on the December CPI numbers on Thursday, CMC said.

These numbers are expected to offer further evidence of slowing inflation, with core prices expected to slip sharply below 6%, it added.

Stocks to Watch

Headwinds are building for EssilorLuxottica, with tougher comparison bases ahead and low China exposure posing a hurdle to growth this year, RBC Capital Markets said, cutting its rating to underperform from sector perform.

The group's sector-leading business model remains attractive and a targeted 19%-20% mid-term operating margin looks attainable, RBC said.

However, as the dollar weakens and China reopens in the year ahead, EssilorLuxottica's high North America exposure and relatively small China business could cap growth, while wage inflation is a further challenge given the group's sizeable retail network, RBC added.

RBC nudged up its target price on the stock to EUR155.

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RBC lifted its rating on Swatch to sector perform from underperform, as China's reopening will disproportionately benefit the company, it said.

Swatch has high exposure to Chinese consumers, and while the recovery in the luxury market won't be a straight line, the group should benefit in 2023, RBC said, adding that the company will also be boosted by new products, high capacity utilization and cost-reduction efforts.

RBC raised its target price on the stock to CHF270 from CHF230.

Economic Insight

The decline in inflation is currently being mainly driven by falling goods and energy prices, but the labor market remains very tight and inflation persistence may have risen permanently, Erste Asset Management said.

"To bet on a sustained decline in inflation would be bold."

Service price inflation could remain uncomfortably high and there are the very difficult-to-assess effects of central banks reducing their bond portfolios, it added.

"At least the bond environment this year is not as predominantly negative as it was last year," Erste said, considering high volatility to stay.

Norges Bank

Norwegian core inflation was a little higher than expected in December, but Norges Bank is unlikely to hike at its meeting next week, instead waiting for the March meeting, Handelsbanken said.

The upside surprise was driven by higher inflation for imported goods, but Handelsbanken expects this to fade moving forward given the drop in commodity prices and easing supply side constraints.

In addition, non-energy domestic goods recorded lower price growth in December, and domestically-produced services, with wages as the dominant cost component, flatlined.

"These are encouraging signs to see, and they should fend off any speculation that Norges Bank will hike already at its upcoming meeting next week."

Read Norges Bank To Stick With Rate Path and Hike in March

Read Norwegian Krone May See Limited Gains Due to Monetary Policy Uncertainty

U.S. Markets:

Stock futures wavered as investors parsed Monday's Fed officials' remarks and awaited comments from Powell.

The yield on the 10-Year Treasury note climbed to 3.546% from 3.516% on Monday.

It's a thin day for economic data, with wholesale inventories at 1500 GMT.

Forex:

The euro could extend its gains against the dollar if today's U.S. event risks allow, including the Powell speech and the NFIB small business sentiment survey, ING said.

Assuming that neither Powell's comments nor the NFIB break growing speculation of a more relaxed Fed, the dollar could fall and boost activity and commodity currencies, ING added.

"This could see EUR/USD pressing last May's high at 1.0785."

"This week there is an outside risk of 1.0950 should Thursday's U.S. December consumer price index data show another soft reading," ING said.

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Sterling could fall as the Bank of England is unlikely to raise interest rates as much as the market expects, although the currency's performance also depends on risk sentiment, MUFG Bank said.

"On its own, less BOE policy tightening will work against the pound, and pose upside risks for EUR/GBP given the European Central Bank is more strongly committed to further large hikes."

However, risk sentiment also remains important for the pound and can offset the impact from yield spreads, MUFG said.

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The Powell speech could boost the dollar if he continues to stress the need for higher interest rates, but it shouldn't upset the trend for a weaker currency, Swissquote said.

Powell would need to push against growing speculation in the wake of Friday's weaker U.S. wage data that rate increases will slow.

"While any hawkish readjustment could give a minor boost to the dollar, the U.S. dollar is set for further weakness this year," Swissquote said, adding that U.S. recession worries will continue to linger.

Read Dollar to Fall if US Inflation Data Eases Further

Bonds:

The French government's pension reform is a medium-term positive for potential growth and debt sustainability, but for OAT spreads, "much of it might be in the price," Citi said.

The French government is set to outline its decision on the pension reform on Tuesday, including an increase in the minimum retirement age.

"Any market reaction would depend on changes the minority government might make to garner support from the centre-right LR," Citi said.

The reform, nevertheless, is likely to trigger strike action over this quarter, Citi added.

Energy:

Oil prices edged lower as risk sentiment soured following comments from some Fed officials who said interest rates would need to rise above 5%, higher than markets are currently pricing in, and remain there for some time.

Higher interest rates could weigh on the U.S. economy and depress demand for oil.

Metals:

Gold and base metals struggled in early trading, as hawkish comments from some Fed officials added pressure to markets.

DOW JONES NEWSPLUS


EMEA HEADLINES

BMW Doubles Electric-Vehicle Sales in 2022

Bayerische Motoren Werke AG said Tuesday that sales of electric vehicles in 2022 more than doubled compared with the previous year, although total yearly sales declined slightly on year.

The German car maker sold 215,755 fully-electric BMW and MINI vehicles in 2022, up 107.7% from 2021, though total sales declined 4.8% on year to 2.4 million units, it said.


French Industrial Production Rebounded More Than Expected in November

French industrial production increased in November as activity returned to normality after strikes at refineries caused a sharp fall in October's output, but the sector continues to face headwinds from high energy costs and weakening demand.

Industrial output--comprising output in manufacturing, energy and construction--rose 2.0% on month, data from the country's statistics office Insee showed Tuesday, beating the 0.8% increase expected from economists polled by The Wall Street Journal.


UK Retail Sales Rose in December Driven by Higher Prices

Retail sales in the U.K. rose in December on year largely due to goods costing more but volumes continued to fall, according to the latest report by KPMG and the British Retail Consortium.

British retail sales for the five weeks between Nov. 27 and Dec. 31 rose 6.9% on a total basis compared with the same period a year before, the report showed. This was above the 2.1% registered in December 2021, and exceeds the three-month average growth rate of 4.4%.


Virgin Orbit Fails to Lift Satellite Load Into Orbit From Europe

LONDON-A Virgin Orbit Holdings Inc. rocket carrying satellites from the U.K. failed to reach orbit after it suffered an anomaly over the Atlantic Ocean, a blow to Richard Branson's ambitions in the growing market for commercial satellite launches.The mission was the first attempt to launch satellites from the U.K. A customized Boeing 747 dubbed Cosmic Girl took off from Spaceport Cornwall, southwestern England, and successfully released a rocket, the company said.

The rocket reached space but experienced an anomaly before it could achieve its target orbit. Cosmic Girl returned safely to Space Cornwall with the flight crew.Shares in Virgin Orbit, which are listed on the Nasdaq stock exchange, fell 21% in off-hours trading after the problem was disclosed.The Start Me Up mission, named after the hit Rolling Stones song, marked the first international mission for Virgin Orbit and its first commercial launch from Western Europe.


Ukraine's Forces Hold Front-Line City of Bakhmut, Zelensky Says

Russian forces launched an intense new assault near the front-line city of Bakhmut on Monday, while Ukrainian soldiers resisted a six-month assault on the area, cementing it as a key symbolic prize in the war.

"Bakhmut is holding out against all odds. And although most of the city is destroyed by Russian strikes, our warriors repel constant attempts at Russian offensive there," Ukrainian President Volodymyr Zelensky said in his nightly televised address to the nation on Sunday.


GLOBAL NEWS

Bank Earnings Put U.S. Economy Under Microscope

If the U.S. is heading into a recession, it could show up in the biggest banks' financial results.

Rising interest rates have slowed inflation from the highest level in decades and begun to cool the hot labor market. American consumers and businesses might show signs of financial strain, and some bank chiefs have sounded dire warnings about the economy.


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01-10-23 0618ET