MARKET WRAPS
Watch For:
EU eurozone GDP-2nd estimate, ECOFIN meeting of EU finance ministers; U.K. unemployment; Germany WPI; France OECD Services Trade Restrictiveness Index launch, OECD ministerial meeting on responsible business conduct, ILO Unemployment; trading updates from ThyssenKrupp, Telecom Italia, Siemens Healthineers, MTU Aero Engines, TUI, Saab
Opening Call:
Shares may open flat in Europe ahead of the U.S. CPI data. In Asia, stock benchmarks were mixed; Treasury yields fell broadly; the dollar weakened; oil fell and gold gained.
Equities:
European stocks are seen mostly unchanged, with traders looking to the January U.S. consumer-price index for clues to the Federal Reserve's interest-rate path and whether the U.S. will see a hard or soft landing for the economy.
Investors broadly expect inflation to continue moderating, though some are wary that inflation could settle above the Federal Reserve's 2% target.
Economists polled by The Wall Street Journal forecast a 0.4% increase in the January CPI, which would slow the year-over-year rate to 6.2% from 6.5% in December.
Year-over-year CPI peaked at a roughly 40-year high of 9.1% last summer. Core CPI, which excludes volatile food and energy prices, is expected to rise 0.3% in January, with the year-over-year rate at 5.4% versus 5.7% in December.
"Given the hawkish tone to last week's Fedspeak, all eyes will be on Tuesday's CPI report for January. Traders will think a more robust CPI print would look less like a one-off and more like part of a trend, which could have a more pronounced impact on the market's view of the terminal," said SPI Asset Management.
"Indeed, this week's U.S. inflation data has the potential to move like a wrecking ball through a market with a more relaxed inflation outlook that investors have been enjoying in recent months," it said.
When the CPI report hits Tuesday, the market will be focused on core services inflation, which is the most affected by tight labor markets and higher wages, Jean Boivin, head of the BlackRock Investment Institute said.
"Hopes for a soft landing have grown, but the cumulative effects of the Fed's rate hikes are likely to eventually stall growth. Unfortunately, this pattern of premature hope seems to occur in most market cycles, as it did in 2006 right before a relatively meaningful economic downturn," said Michael Reynolds, vice president of investment strategy at Glenmede.
Forex:
The dollar weakened in Asia, amid a cautious mood ahead of the U.S. CPI data.
With stronger U.S. data, market focus has shifted back to the Fed from the China and EU growth rebound, JPMorgan analysts said.
"The combination of lower near-term US recession risks and the still intact regime-upshift in RoW growth/downshift in inflation should be supportive of high beta FX," the analysts said.
The added layer of hawkish Fed repricing isn't automatically USD bullish but it skews the backdrop in favor of FX carry as high yielders should be more insulated.
"There are still considerable concerns about the ultimate destination which could involve a hard landing and thus eventually result in USD strength."
The CPI release will determine if market focus stays on the Fed.
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The sterling might come under pressure in coming months given the U.K.'s poor economic fundamentals, Rabobank said.
"Currently the U.K. is the only G7 economy not to have recovered its pre-pandemic levels," Rabobank said.
"In addition to weak growth, its fundamentals are characterised by high inflation, low productivity, weak investment growth, post Brexit trade frictions and a current account deficit."
Bonds:
Treasury yields mostly fell, as investors brace for the U.S. inflation data.
Strategists said market sentiment remained on the defensive ahead of January's U.S. CPI data on Tuesday and after recent CPI readings were revised higher.
"We continue to see the terminal rate of this hiking cycle as most likely to be 5-5.25% (midpoint: 5.125%), to be reached via two additional hikes of 25 basis points each, at the March and May FOMC meetings," said a team at Monetary Policy Analytics in Washington.
"However, we now see the risks to the level of the terminal rate as tilted to the upside."
Energy:
Oil futures fell early Tuesday, dragged lower by news that the U.S. plans to sell oil from its strategic reserve.
ING commodities strategists noted media reports citing the Department of Energy saying that is planning to sell 26 million barrels of crude from the Strategic Petroleum Reserve.
According to a statement on the SPR website, the delivery period for the sale is April-June.
The development comes amid speculation in recent weeks that the U.S. would cancel or postpone the SPR release after last year's emergency releases, the strategists added.
Geopolitical tensions are also a focus among traders, said Naeem Aslam, chief market analyst at AvaTrade, after the U.S. military recently shot down a fourth unidentified object.
There were concerns among traders that this unidentified object could be a Chinese spy balloon, he said.
"The fear here is that things can get out of control and tensions could flare up between the two major superpowers, which could adversely influence sentiment among traders," said Aslam.
Metals:
Gold prices advanced in Asia, in a likely technical rebound, after prices settled at their lowest level in more than five weeks on Monday.
How the precious metal performs following Tuesday's U.S. inflation report will probably determine whether prices climb toward $1,900/oz or slide toward $1,800/oz, Oanda said.
The precious metal could stay heavy if, after the inflation report, Wall Street begins to fully price in two more 25bp rate increases and is on the fence about a third one, Oanda added.
"Rumors are swirling the data could easily come in above estimates and a hot data point could lead to both U.S. equities and gold taking a quick and pronounced hit to the downside," Jeff Wright, chief investment officer at Wolfpack Capital said.
"The concern for gold throughout January was that it was trading on sentiment rather than reality and, while the indicators throughout last month matched up with this forward-looking view, it would only take one or two data points out of line with the prevailing view for the precious metal to suffer a price shock," said Kinesis Money.
"For now, gold investors will be hoping that this week's U.S. inflation data positively surprises to once again give the U.S. central bank room to hit pause on more hikes," it said.
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Copper prices rose early Tuesday amid supply disruptions.
Freeport-McMoRan said Sunday that PT Freeport Indonesia's Grasberg operations have been temporarily disrupted due to substantial rainfall and landslides in the area of its milling operations in Papua.
The operations could be out for the rest of the month and is adding to other disruptions, including Las Bambas and Antapaccay mines in Peru dealing with social unrest, ANZ Research analysts said.
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Chinese iron-ore futures fell as demand from steel mills has fallen in recent weeks.
Negative factors were rising in the upstream sectors, including the steel market, which was likely weighing on prices of ferrous metals, Donghai Futures analysts said.
Some fundamental factors supporting iron-ore prices still exist in the short term, but demand could fall in a few months, Donghai said.
TODAY'S TOP HEADLINES
Lael Brainard Set to Lead White House National Economic Council
President Biden is set to name Federal Reserve Vice Chair Lael Brainard to serve as his economic-policy coordinator at a difficult time when the U.S. economy faces headwinds from high inflation, climbing interest rates and slowing growth, according to people familiar with the matter.
She will succeed Brian Deese as the director of the National Economic Council, which is responsible for advising the president on policy and personnel decisions and coordinating policy making across executive branch agencies. Mr. Deese is planning to step down this month.
Kazuo Ueda Is Nominated to Lead the Bank of Japan
TOKYO-The Japanese government on Tuesday nominated Kazuo Ueda to become the next governor of the Bank of Japan, the first leadership change in a decade after Gov. Haruhiko Kuroda's aggressive monetary easing.
Mr. Ueda, 71, is a former University of Tokyo professor of economics and served on the BOJ's policy board from 1998 to 2005.
Why January's CPI report could deal a massive blow to the stock market
The stock market's start-of-year rally is poised to fizzle if a highly-anticipated U.S. inflation report on Tuesday dashes hopes for a quicker retreat in the cost of living in America, warned market analysts.
The January CPI reading from the Bureau of Labor Statistics, which tracks changes in the prices paid by consumers for goods and services, is expected to show a 6.2% rise from a year earlier, slowing from a 6.5% year-over-year rise seen in the previous month, according to a survey of economists by Dow Jones. The core price measure that strips out volatile food and fuel costs, is expected to rise 0.4% from December, or 5.5% year over year.
Europe Sets Rules for Producing Green Hydrogen
The European Union issued strict regulations for what qualifies as renewable hydrogen under its clean-energy transition plan, shaping how companies are expected to deploy billions of euros of investments in hydrogen factories in the coming years.
Governments around the world are looking to hydrogen to help replace fossil fuels in industrial processes and electricity generation. Current supplies of hydrogen are largely produced from cracking open molecules of natural gas. The U.S., Europe and other countries are planning to invest hundreds of billions of dollars on factories that use electricity to power machines called electrolyzers, which produce hydrogen by splitting open molecules of water.
Moldova's Pro-West President Accuses Russia of Planning Coup
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02-14-23 0015ET
