MARKET WRAPS
Stocks:
European stocks were down Thursday, while London's FTSE 100 was hovering near flat, with the index pulled in different directions amid a wave of quarterly earnings releases.
Federal Reserve officials are signaling that an interest-rate rise could come as soon as March. The Fed's James Bullard said Wednesday that four rises were likely in 2022. Governor Lael Brainard is scheduled to speak in front of the Senate Banking Committee at 10 a.m. ET in her nomination hearing to become vice chair and investors are waiting to hear her views on inflation and the economic recovery.
"The main story is the market view on the central bank's next steps. The market is balancing two things: less support from monetary policy, but overall the underlying economy is good and we think the earnings figures that will start to come out now will be quite strong," said Luc Filip, head of investments at SYZ Private Banking.
"Yesterday's market reaction could raise the hope that perhaps global inflationary pressures might be starting to diminish," said Michael Hewson, an analyst at broker CMC Markets.
"This seems a little premature on the basis of one month's numbers, however this afternoon's U.S. PPI could add an extra quiver to that argument if we see a similar trend in today's December numbers," he added.
"PPI has tended to be a leading indicator for headline CPI for most of last year, and is already well above CPI levels."
Shares on the move: Shares in Persimmon dropped 3.1% after the U.K. house-builder said its current forward-sales position for the year fell slightly on-year.
Total forward sales value was GBP1.62 billion as of Dec. 31, compared with GBP1.69 billion a year earlier. "With approaching 300 sites in operation, Persimmon has a lot of moving parts," Hargreaves Lansdown fund manager Steve Clayton said.
"Some analysts expected turnover to be a shade higher, but then again, the big jump in forward bookings, up from GBP1.32 billion to GBP1.62bn, suggests demand is fine and most likely, some completions slipped over the year-end as Omicron raced through workforces up and down the country."
Tesco was among the biggest FTSE 100 fallers, down 1.6% even after the U.K. grocer reported stronger-than-expected sales to date and said it expected full-year retail operating profit slightly above previous top-end guidance.
In a 3Q update covering the 19 weeks to Saturday, Tesco said Christmas performance had been strong. "Shareholders seem a little less impressed, with the shares falling back in early trade," CMC Markets analyst Michael Hewson said.
"This response seems a little churlish, but may have more to do with the fact that the shares are close to their highest levels in 11 months. It certainly doesn't mean they can't go higher longer-term."
ASOS shares jumped 9.8% after the online clothing retailer kept full-year guidance unchanged despite supply-chain issues and coronavirus variant-related uncertainty. Though a 5% sales rise in the four months to Dec. 31 might not seem remarkable, it has gone down well with investors who perhaps feared it wouldn't even achieve that, AJ Bell said.
"The challenge now is to achieve stronger growth," AJ Bell investment director Russ Mould says, adding that the AIM-listed company's plan to move to London's main market by the end of February means it should qualify for a place in the FTSE 250 index later this year and benefit from index funds buying its stock.
Data in focus: The latest economic data released in the eurozone point to a relatively strong fourth quarter with upside surprises in November for industrial production and retail sales, HSBC's economist Chantana Sam said.
"Granted, the impact of Omicron could be more visible in 1Q, but the latest business surveys and high-frequency data aren't pointing to a significant plunge in activity either," Sam said.
However, staff absences due to the sharp rise in the number of people infected and in quarantine and real income squeeze due to high inflation could be a drag on economic activity at the start of 2022, the economist said.
UniCredit expects Italian industrial production increased modestly in November, by 0.4% on month, following a 0.6% on-month decline in October.
This is likely to reflect a slowdown of growth in industrial activity in the fourth quarter of 2021, after a relatively strong performance in the previous quarters, economists at UniCredit said.
Furthermore, this will reflect the negative impact of intensifying supply-side constraints, the bank said. The latest readings of confidence indicators in Italy hint at some upside risks to UniCredit's call, economists said.
U.S. Markets:
Stock futures wavered and bond yields rose ahead of fresh data on inflation and the labor market that may provide some insight into the path ahead for monetary policy.
The U.S. producer-price index, an inflation metric that measures the prices of goods exiting factories, is slated to go out at 8:30 a.m., as is the latest data on weekly jobless claims. Economists are expecting the tight labor market to have kept a lid on layoffs, a continuation of the trend that has kept the weekly level below the 2019 average since early December.
Earnings season kicks off this week, with Delta Air Lines set to post results early Thursday. Major financial firms including BlackRock, Citigroup, JPMorgan and Wells Fargo are set to report Friday.
Investors are on edge for bank earnings after Jefferies posted revenue and earnings that missed analysts' estimates Wednesday, said Jeffrey Meyers, a consultant at Market Securities. The stock fell 9.3% and continued to decline Thursday in off-hours trading, retreating another 0.9%.
Forex:
The dollar dropped to a two-month low against the euro and a basket of currencies, continuing Wednesday's falls after data showed U.S. CPI inflation at a 39-year high of 7.0% in December. Investors may need evidence of stronger growth to start buying the currency again, said MUFG.
Although the data confirms expectations of swift interest-rate rises, U.S. rates markets show "relatively poor" expectations for rate rises beyond this year, said Derek Halpenny, MUFG's head of research for global markets EMEA.
A catalyst for renewed dollar strength could be economic data "that convinces the market of stronger growth" and raises forecasts for the Fed's terminal rate. The DXY dollar index falls 0.2% to 94.7460. EUR/USD rises 0.3% to 1.1478, according to FactSet.
Political uncertainty surrounding calls for U.K. Prime Minister Boris Johnson to resign are unlikely to have much impact on the pound, MUFG Bank said.
"Firstly, we doubt we have arrived at that juncture," MUFG analyst Derek Halpenny said. An inquiry over claims Downing Street officials held a series of parties during lockdown could take weeks, he said.
Secondly, a new prime minister wouldn't "dramatically" change policy to a degree that would affect sterling's performance, he said.
The Turkish lira weakened 2.3% against the dollar, trading at 13.5 lira to $1. Due to its recent volatility, Turks have increasingly sought to hold their savings in other currencies, even crypto.
Bonds:
Volatility across fixed-income markets is still high with eurozone government bonds remaining under pressure, UniCredit said.
Therefore, the bank would limit exposure to duration for the time being, it said ahead of Italy's bond auction and Ireland's 10-year bond syndication. Italy will auction a total of EUR6 billion-EUR7 billion in December 2024- and February 2029-dated BTPs.
Trading at a positive yield of around 0.085%, according to Tradeweb, the December 2024 BTP looks attractive against swaps and bonds of a similar tenor, UniCredit said.
The Italian bank's strategists find the seven-year area of the Italian yield curve "rather expensive," expecting this maturity segment to underperform the "wings"--or shorter and longer maturities--if yields continue to rise.
The yield on the benchmark 10-year Treasury note ticked up to 1.745% Thursday from 1.724%
Wednesday, reversing direction after two sessions of declines. Shorter-dated bond yields also climbed, with the 2-year yield reaching 0.929%, up for a third day.
Capital Economics raises its previous forecasts for global government bond yields as it continues to expect central banks' tighter monetary policy to drive them further upward, markets economist Franziska Palmas said.
"We continue to expect monetary tightening to push up 10-year government bond yields across developed markets but we now forecast them to reach a higher level than we had previously anticipated, especially in the U.S., Germany and the U.K.," she said.
CE now forecasts the 10-year U.S. Treasury yield to reach 2.25% by end-2022 and 2.75% by end-2023, up from its previous forecasts of 2.00% and 2.25%, respectively. It expects the 10-year Bund yield to rise to 0.50% by the end of 2023 versus 0.25% anticipated previously.
The U.S. December CPI report, which comes on the back of last week's drop in the unemployment rate, confirms Pimco's expectations for the Fed to begin hiking interest rates in March and wind down their balance sheet later this year, said Tiffany Wilding, US economist at Pimco.
This latest CPI report was in line with baseline forecast for core CPI to peak around 6% in February, before ultimately moderating in the second half of the year, she says, but adds that Pimco is increasingly focused on risks from Omicron variant outbreaks.
Wilding said Pimco also remains concerned about the impact that more disruption to production in China and other key suppliers could have on U.S. retail inventories and prices.
Commodities:
Oil prices wavered after mixed data on stockpiles from the Energy Information Administration. The EIA stockpiles data, released Wednesday, showed that crude oil inventories dropped by a larger than forecast 4.5 million barrels last week.
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01-13-22 0652ET
