European Midday Briefing : Stocks Weaken on Fed Rate Path Doubts

MARKET WRAPS

Stocks:

European stocks were back in the red on Friday, as investors continued to reconsider dovish Federal Reserve rate bets.

The monthly U.S. jobs report at 1330 GMT, if strong, could pour more cold water on market expectations the Fed will cut interest rates as early as March.

U.S. Markets:

Ahead of the jobs report, stock futures were a little lower and Treasury yields were up, above 4%.

Economists forecast that hiring slowed and unemployment ticked higher from November.

Here is a roundup of projections from economists surveyed by The Wall Street Journal:

170,000 new jobs added in December, versus 199,000 in November

3.8% unemployment rate, up from 3.7% in November

Average hourly earnings up 0.3% from November

Forex:

Eurozone provisional inflation data for December are due at 1000 GMT and could lift the euro if they mirror Thursday's higher-than-expected German inflation figures and dampen expectations for interest-rate cuts by the European Central Bank, ING said.

"Today's release of December CPI for the euro area looks as good an excuse as any for a repricing of the 2024 ECB easing cycle," ING said, adding that this should offer the euro a little support.

Gains could be limited, however, given that expectations for fewer rate cuts could dampen risk appetite.

The dollar rose ahead of U.S. monthly jobs data. Thursday's ADP private payrolls and weekly jobless claims were better than expected and bond yields rose, lifting the 10-year Treasury yield above 4%.

"With [U.S.] money markets currently pricing 16bps of easing in March this year, there is still clearly some room for a further back-up in short-term rates," ING said.

This year's trend of a rising DXY dollar index "has a little further to run," it added.

Bonds:

Citi Research has affirmed its year-end target of 2.15% for the 10-year German Bund yield, taking a strategically neutral duration.

Citi Research had set this target in early December, prior to the rally that took place late last year, implying its forecast has already been breached.

"However, we do not feel inclined to adjust the year-end forecast. While we firmly believe the yield peak...is unlikely to be revisited, we are not inclined to chase the rally."

Citi also said the spread between 10-year Italian BTP and German Bund yields is around 15 basis points too tight versus its medium-term outlook.

Commerzbank Research said eurozone government bond supply scheduled at auctions next week is expected to be around EUR20 billion--with the exact volume being subject to Italy's announcement on Monday--and is expected to be accompanied by syndications.

Societe Generale Research said Belgium faces a potential rating downgrade in mid-February when Fitch reviews the country's AA- rating which has a negative outlook.

"We think there's a decent risk that the rating agency will downgrade the country to A+, as the June election will unlikely result in any positive surprises vis-a-vis the country's public finances."

Energy:

Oil prices edged higher in Europe on persisting concerns over escalating tensions in the Middle East and disruptions to global supply.

"There is still plenty of tension in the Middle East with Houthi rebels launching a sea drone in the Red Sea, [while] a U.S. air strike in Baghdad killed a commander of an Iranian-backed militia group, and Islamic State claimed responsibility for two explosions in Iran earlier this week," ING said.

Metals:

Base metals were weaker and gold flat ahead of the U.S. nonfarm payrolls report, with investors aiming to gauge how the Fed will approach monetary policy this year

"With the data looking more promising, yesterday saw investors grow increasingly skeptical about the likelihood of a rate cut by March," Deutsche Bank said.

EMEA HEADLINES

Sodexo Backs Forecast After 1Q Revenue Growth

Sodexo posted an increase in revenue for the first quarter and said it is on track to meet its fiscal 2024 targets.

The French catering and food service company on Friday posted revenue of 6.29 billion euros ($6.89 billion) for the quarter ended in November, up 8.2% organically from the same period last year. On a reported basis, revenue grew 3.1%.

Supermarket Giant Drops Pepsi and Lay's Over Price Increases

One of the world's biggest supermarket chains said it would drop several PepsiCo products to protest what it called unacceptable price increases, a rare public standoff between a grocer and food maker after more than two years of rising prices.

Carrefour, which operates thousands of stores across more than 30 countries, said it would stop selling Pepsi, Doritos and other products in France, Italy, Spain and Belgium. A spokesman for the French company said Thursday that it had decided to add notes to store shelves to explain the changes to customers.

U.K. Economy Faces Mounting Uncertainties in 2024

The only certainty in 2024 could be uncertainty for the British economy, still reeling from sky-high inflation and rapidly rising interest rates, and gearing up for a general-election.

Indeed, the U.K. is probably the macroeconomic environment where uncertainty is the highest, according to Julien Lafargue, chief market strategist at Barclays Private Bank.

GLOBAL NEWS

Markets Moving in Lockstep Threaten to Make for a Trying 2024

Some investors hold that as goes January, so goes the year. The performance so far-with the S&P 500 down 1.7% by Thursday's close-doesn't hold out great hope. But the first three trading days of the year offered a useful run-through of three of the ways that inflation and the economy affect your portfolio.

The year started the way the last one ended, with all the focus on the Fed and inflation, only in the opposite direction.

What to Watch in the Jobs Report: Slower Hiring Adds to Case for Soft Landing

The December employment report will show the labor market continued to cool but still added jobs at a solid pace as unemployment remained low, analysts estimate.

North Korea Fires Artillery Barrage Toward Border Islands in the South

SEOUL-North Korea fired more than 200 artillery shells near the western border islands of South Korea on Friday, prompting Seoul to issue an emergency-shelter order for residents at a time when tensions between the two countries have escalated.

No residents were injured at the Yeonpyeong and Baengnyeong islands, which are located just miles from North Korea's coastline, Seoul's military said. The barrage of shells, launched from roughly 9 a.m. to 11 a.m. local time, landed in North Korean waters shy of the Northern Limit Line, a disputed inter-Korean maritime border.

U.S. Seeks Drone Bases in Coastal West Africa to Stem Islamist Advance

NAIROBI-The U.S. is seeking to base military drones along the West African coast in an urgent effort to stop the spread of al Qaeda and Islamic State in the region, according to American and African officials.

The U.S. is holding preliminary talks to allow American unarmed reconnaissance drones to use airfields in Ghana, Ivory Coast and Benin, countries on the Atlantic Ocean. Relatively stable and prosperous, the three coastal countries, along with Togo, now find themselves threatened by Islamist militants surging south from Mali, Burkina Faso and Niger-three beleaguered nations in the Sahel, the semidesert band south of the Sahara.

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This article is a text version of a Wall Street Journal newsletter published earlier today.

(END) Dow Jones Newswires

01-05-24 0509ET