MARKET WRAPS
Watch For:
EU Money supply in Euro area, business & consumer surveys; ECB Executive Board Member Philip Lane speaks at Ireland EU50 seminar series event; Italy business and consumer confidence surveys; trading updates from Dechra Pharmaceuticals, Bunzl, Associated British Foods, Veon
Opening Call:
Shares may open higher in Europe, as investors recaliberate their rate expectations after Friday's strong U.S. data. In Asia, stock benchmarks were lower; Treasury yields were mixed; the dollar strengthened; while oil and gold declined.
Equities:
European stocks may advance at the start of the week, even as hot U.S. economic data has rekindled worries about restrictive Federal Reserve policy.
Investors' enthusiasm is waning after a string of reports have indicated the U.S. is seeing stickier-than-expected inflation and a resilient economy, keeping the door open for the Fed to maintain aggressive monetary-tightening measures in order to cool price pressures.
On Friday, January's personal-consumption-expenditures price index overshot economists' expectations. The core reading excluding food and energy, considered the Fed's preferred gauge of inflation, rose 4.7% year on year. That was ahead of consensus forecasts for a 4.4% increase.
"During the January rally, it looked like we were going to glide through a Fed tightening cycle without any damage to the real economy," said Mike Edwards, deputy chief investment officer of Weiss Multi-Strategy Advisers.
"Now, that certainty is fading more and more each day."
"The market is recalibrating and acknowledging that the path toward price stability is fraught with obstacles," said LPL Financial.
"The market is telling us to be careful, with a Fed that has to vanquish inflation and hurt the economy to do it."
Read: The 2023 stock market rally looks wobbly. What's next as investors come to grips with a further rise in interest rates?
Forex:
The U.S. dollar gained early Monday on risk-off sentiment.
The king-dollar trade looks like it wants to make a comeback, Oanda said, following a "scorching hot" PCE print.
The Fed's rate hiking campaign looks like it might go into the summer, especially if the labor market refuses to break, it said.
The strength of the dollar depends on how much markets worry about the Fed, Insight's Francesca Fornasari said.
Markets project the terminal rate at a 5.25%-5.5% range, reflecting recent upward shifts. Fornasari reckons it may go even higher.
A resilient global economy, coupled with sticky inflation, will support the dollar for the time being, but a recession could also benefit the currency, Fornasari said.
One possible outcome is a "hard recession" leading investors to seek safe assets. "US investors sit on the largest pool of dollar assets in the world and whenever you have weak growth there is a tendency to repatriate money ... and in that environment you tend to see the dollar do well."
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The euro could weaken further if coming data show eurozone inflation eased in February, Unicredit Research said.
"We expect the eurozone's preliminary headline consumer price index for February to drop back to +8.0% year-on-year and the core rate to return to +5.2% year-on-year," it said.
In January, headline CPI rose 8.6% and core CPI increased 5.3%.
EUR/USD could fall further below 1.06, moving closer to the key 1.05 threshold, it added.
The inflation data are due on March 2.
Bonds:
U.S. treasury yields were mixed early Monday after a new batch of data showed home sales and inflation in January running hotter than expected, adding pressure on the Fed to extend its aggressive monetary tightening.
This is a headwind for stocks, Navellier & Co. chairman Louis Navellier said, pointing out that the two-year yield was close to 4.8%.
"This continues to make parking money in short-term CDs an increasingly attractive alternative to stocks. Equity outflows are accelerating and going into fixed income."
"Expectations were set for a hotter core PCE, but it turned out that the macro economy is running away from the Fed. Services are the driver, but the end of core goods deflation is a strong sign that the Chinese reopening is coming through consumer and producer prices. The second chapter of the pandemic inflation has started, and this makes the [risk] management of disinflation even harder," said Ben Emons, senior portfolio manager and head of fixed income at NewEdge Wealth LLC.
"The market is therefore repricing the projection of Fed Funds with a puzzling caveat," Emons said.
"What level of rates is adequate to kill the weird relationship of the stronger economy, the higher the risk of the recession? To get a resolution around this issue, the Fed could be in for a harder landing of its own policy."
Energy:
Oil futures declined in Asia, amid doubts about whether OPEC will continue to keep its production cut intact.
"We assume that the China demand boom and flattish non-OPEC supply will push the market in deficit from June onwards, and lead OPEC to announce a reversal of its production cut at the June meeting, said Goldman Sachs analysts.
However, OPEC leaders have emphasized that the October production cut is there to stay for the rest of 2023, and OPEC has historically responded cautiously to domestic demand pulls out of China, they added.
Two Russian companies have announced that they plan to reduce their exports in March, presumably due at least in part to low prices, said Commerzbank.
"If there are increasing signs that this is likely to happen, and if the [International Energy Agency's] assessment of declining Russian production proves accurate, prices are likely to be pushed up," it said.
Meanwhile, a slight upturn in purchasing managers' index readings for the manufacturing sectors in the U.S. and China -- the two largest markets -- should lend additional support, it added.
Metals:
Gold edged lower in Asia continuing its recent decline.
Gold fell last week following a hotter-than-expected U.S. PCE inflation figure, although it was still trading above the $1,800/oz level, Oanda said.
It reckoned that the bearish momentum could be strong if gold manages to break below that level.
Gold prices were likely to continue to wobble as more traders expect U.S. Federal Reserve interest rates to stay higher for longer, it added.
"The evolving new narrative of more robust U.S. growth, payrolls, retail sales, and the additional Fed response required to tame the rude health of the U.S. economy sees investors catching up to the Fed 'higher for longer,' which has hurt gold," SPI Asset Management said.
It sees potential for a shift toward cooler economic data in favor of gold when February releases on U.S. consumption, labor and inflation come in a few weeks, "but we need that recession angst back to nudge forward market-based rate-cut expectations," it added.
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Aluminum rose in a likely technical rebound early Monday after sliding markedly on Friday.
That came after the White House on Friday imposed 200% tariffs on imported aluminum from Russia, and aluminum imports from elsewhere that include Russian aluminum, as part of a package of duties on Russian metals, minerals and chemicals worth about $2.8 billion.
Although U.S. imports of refined metal from Russia have already dropped to extremely low levels, the duty on products could still have a big impact on trade flows, ANZ Research analysts said.
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Chinese iron-ore futures fell on rising worries of Fed tightening that could slow global economic growth and undermine iron-ore demand.
There was "hot" U.S. inflation data as the January PCE price index was higher than expected, said Saxo Markets.
That led to a hawkish shift in market expectations of the Fed rate-increase trajectory, bringing the terminal rate pricing to 5.4% and reducing the rate cuts priced in for 2023, it added.
TODAY'S TOP HEADLINES
Investors Are Bracing for Surge in Market Volatility
Fear is creeping back into the stock market. To protect against a potential downturn, traders are scooping up hedges at the fastest clip since the onset of the Covid-19 pandemic.
More call options betting that the Cboe Volatility Index, or VIX, will rise have changed hands on an average day in February than at any time since March 2020, Cboe data shows.
War in Ukraine Drives New Surge of U.S. Oil Exports to Europe
A year of war in Ukraine is revitalizing U.S. oil exports as a source of financial influence and geopolitical power.
As the West has shunned most Russian energy, unleashing a pressure campaign against the Kremlin's petroleum revenues, record U.S. crude exports have helped fill the gap in Europe with the oil needed to produce gasoline, diesel and jet fuel.
U.S. Aluminum Producers Support Biden Tariffs on Russian Imports
U.S. aluminum companies said they supported the Biden administration's move to impose steep tariffs on imported Russian aluminum, as analysts and executives predicted the new duties would have a minor effect on domestic aluminum costs.
The White House on Friday imposed 200% tariffs on imported aluminum from Russia, as well as aluminum imports from elsewhere that include Russian aluminum, as part of a package of duties on Russian metals, minerals and chemicals worth about $2.8 billion. The tariff package coincided with the one-year anniversary of Russia's invasion of Ukraine.
U.K. and EU Look To End Feud Over Northern Ireland
LONDON-U.K. Prime Minister Rishi Sunak and European Commission President Ursula von der Leyen will meet Monday to attempt to seal a compromise agreement on the trading status of Northern Ireland, potentially ending a yearslong feud that has poisoned relations between the two sides and sparked concern in the Biden administration.
(MORE TO FOLLOW) Dow Jones Newswires
02-27-23 0015ET
