MARKET WRAPS
Stocks:
European stocks were struggling for momentum on Friday in cautious trading ahead of the release of the Federal Reserve's preferred measure of inflation.
"On one side of the very narrow path to a U.S. soft landing lies a cliff edge into the recession abyss," SPI Asset Management said.
"Investors have been skirting that chasm thanks to favorable inflation trends. Hence to no small degree, the Fed's reaction function to inflation, with business surveys flashing red, suggests today's core PCE could be a significant market mover," SPI added.
CMC said that regardless of today's PCE data, "it seems almost certain that we will see the Fed raise rates by another 25bps next week, and judging by the rally in U.S. stocks yesterday, the market has increasingly priced in that outcome instead of what might have been a 50bps move."
Stocks to Watch
Airbus is expected to be within touching distance of its 2022 EBIT guidance when it reports its earnings next month, but its expectations for 2023 are unlikely to help shares, Jefferies said.
The brokerage downgraded its rating on Airbus to hold from buy and reduced its target price on the European plane maker's share to EUR130 from EUR135.
On the back of the company's 2022 delivery miss, Jefferies estimates Airbus will guide for 740 plane deliveries in 2023 and an EBIT range of between EUR5.9 billion and EUR6 billion.
"There may be further downside risks to this range if management assumes a significant cost ramp, but we believe past performance would limit consensus downgrades below this threshold."
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Siemens remains compelling on a multi-year view but it is likely to get harder for the German industrial company to beat market estimates in 2023, Berenberg said.
The German brokerage downgraded its rating on the stock to hold from buy and reduced its target price to EUR170 from EUR175.
"We think there is limited upside risk to near-term consensus estimates and the next leg of the re-rating story, at least relative to peers, likely requires further portfolio action," Berenberg said.
Central Banks
Both the Fed and the European Central Bank will want more reassurance about a downward trend in inflation and see their policy tightening actions as a "long-distance run, not a sprint," Societe Generale said.
SG considers the market pricing of ECB interest-rate rises as not-coherent as it expects the ECB to continue its long-distance race at least until the summer.
Given the more resilient-than-expected economy and sticky inflation, the ECB still needs to deliver interest-rate rises to tame inflation, SG added.
Besides a 50bp interest rate rise in February, SG expects the ECB to strongly push back against the market's dovish mood and excessive pricing of rate cuts.
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A 50 basis-point interest rate rise by the ECB is "baked in" for next week's meeting, and it is unlikely to be the last one, unless the updated March forecasts provide a dramatically different outlook for inflation and growth compared to December, Federated Hermes Limited said.
"Further down the line, downside risks to the growth outlook are still pronounced, primarily stemming from structurally higher energy prices and a slowdown--possibly a recession--in the U.S. later this year."
As central banks are slow moving and data provides a backwards-looking picture of the economic situation, there is a risk the ECB will end up over-tightening, Federated Hermes added.
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The eurozone is likely to avoid a recession this winter, and while this is good news in the short term, it also brings with it problems, Pimco said.
If the recent resilience continues, the prospect of a ECB raising interest rates for longer would become very real, and probably rates would increase more than is currently priced into the market, Pimco added.
"Admittedly, we still expect the economy to weaken as some of the support from order books fades and tighter monetary policy feeds through to the economy."
Markets are pricing in the ECB's peak deposit rate slightly below 3.30% in June versus the current 2%, according to Refinitiv data.
U.S. Markets:
Stock futures edged lower with fresh inflation data eyed and with chipmakers likely to come under pressure following Intel's bleak outlook.
Intel's warning that the data-center market would contract in the first half of this year was taken as particularly poor news for AMD and Nvidia, which compete heavily in the sector.
The yield on the benchmark 10-year Treasury note ticked up to 3.539%, from 3.491% Thursday.
Big-name earnings due today include Chevron, Colgate-Palmolive, and American Express are due to report quarterly results before the market opens.
Forex:
The euro is holding up well above key chart support at $1.0850, which looks to have "formed a buy-the-dip floor" as traders look ahead to next week's ECB meeting, ING said.
ING expects the ECB to raise interest rates by 50 basis points next week, and to "maintain a hawkish tone" by pushing back against any speculation about rates being cut later in the year.
The impact on the euro may be limited, however, while any recovery in the dollar in the run-up to or after the Fed decision--which also takes place next week--could potentially cause EUR/USD to break lower, ING added.
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Dollar selling has started to fade as investors gear up for decisions by the Fed, ECB and Bank of England next week, MUFG said.
The DXY dollar index has kept above 101.50 while EUR/USD stayed below 1.0930, MUFG added.
"After the optimism fuelled by China reopening and falling natural gas prices that weakened the dollar, some reversal of that sentiment should result in some renewed strengthening."
A dollar recovery is possible though moves will be limited ahead of the rate decisions, MUFG said.
Bonds:
As a result of opposite forces, eurozone government bond yields are expected to move sideways in the first half of 2023, SEB said.
Increasing government bond issues, banks' repayment of loans taken via the ECB's targeted longer-term refinancing operations and balance-sheet reduction will push bond yields slightly higher, the bank said.
However, an anticipated downtrend in Treasury yields, as well as a likely increase in market pricing of ECB rate cuts later will limit the upside in long EUR rates, it added.
SEB expects the 10-year Bund yield to trade mostly between 2.00% and 2.50% in 1H.
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Eurozone sovereigns on aggregate have completed almost 12% of their annual bond issuance targets in January, Landesbank Baden-Wuerttemberg said.
LBBW's forecast for the eurozone's gross government bond issuance in 2023 is EUR1.245 trillion.
Including German and Italian bond auctions on Jan. 31, eurozone sovereigns will have issued EUR143 billion in government bonds this month, LBBW said.
This is higher than the previous January record of EUR136 billion in 2021, it added.
The highest monthly volume of government bond issuance in the eurozone was in June 2020, with EUR149 billion, LBBW said, as countries raised their initial bond issuance targets to cope with the economic impact of Covid-19.
Energy:
Oil prices edged higher but are set to end the week flat as the market awaited clues on Chinese demand and the focus turned to OPEC.
An OPEC+ advisory committee is set to meet next week and is likely to recommend the cartel keeps its production levels unchanged, ANZ said.
The cartel is likely to await clarity on Chinese demand for oil this year after its reopening and the impact of fresh sanctions on Russia set to come into force early next month, ANZ added.
Metals:
Base metals were mixed, with gold lower, ahead of China and other Asian markets returning to trading next week following the Lunar New Year break.
China's return is set to boost metal demand, particularly after strict Covid-19 lockdown restrictions tapered buying.
"Bullish sentiment is swaying prices,with metals markets enjoying strong upward momentum ever since Beijing shifted its strategy on Covid-19," Fitch Solutions said.
Fitch expects a further uplift in both physical demand and prices from the second quarter amid a weaker U.S. dollar.
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01-27-23 0622ET
