MARKET WRAPS
Stocks:
European stocks traded higher on Tuesday ahead of the U.S. CPI data for January, this week's most important indicator, which will likely dictate the Federal Reserve's rate policy.
A potential slowing in inflation "doesn't only mean a healthier economy and less pain for the future, but it means that the Fed could indeed soften the tone as the policy rate approaches the 5% level, and a weakening pressure on borrowing costs could give a loving hand to stocks and bonds," Swissquote Bank said.
To sustain the current bullish sentiment, "growth momentum, particularly sentiment indexes, has to pick up," SPI Asset Management said, adding that "a considerable upside surprise in the CPI print could result in markets pricing higher odds for a terminal rate above 5-5.25%."
Stocks to Watch
Liberty Global's deal for a GBP1.2 billion stake in Vodafone is a bet that the U.K.-listed telecommunications company is going to be an important cog in the system, AJ Bell said.
"By acquiring nearly a 5% stake Liberty Global is essentially getting its foot in the door should any new deals start to emerge. The company says the stake is only for investment purposes, but it's got form in seeking optionality for potential deals."
Vodafone is in a fragile place and the market expectation is that stakeholders may try to extract some value from the business, Bell said.
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Societe Generale could see significant improvement in 2024 after a subdued and transitional 2023 with more headwinds than tailwinds coming, Deutsche Bank said.
The French lender's retail-banking revenue in its home market is likely to be under more pressure than expected, its global-markets revenue will normalize after a strong two-and-a-half year period and car-financing revenue won't exceed last year's performance, it added.
However, 2024 should see significant improvement, and SocGen is on track to meet its medium-term revenue and cost targets, but ROTE is expected to miss its target on a higher cost of risk, DB said.
DB cut SocGen to hold from buy and lowered its target price to EUR33 from EUR37.
European Central Bank
Algebris Investments shares the market's view regarding the pricing of the ECB's terminal rate--where it stops raising--, but it also sees upside risks there.
Markets price the peak ECB deposit rate at 3.50% in July, according to Refinitiv data. " We agree with this pricing, but even see upside risks, as our inflation models show Eurozone core inflation staying sticky around 5% until mid-summer ," the asset manager said.
In such a scenario, Algebris doesn't think that the ECB can afford to slow down and may signal further increases beyond that. Against this backdrop, it remains cautious on European duration.
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Fragmentation risks in the eurozone don't seem to be elevated now despite strong interest-rate rises by the ECB, J. Safra Sarasin said.
"On the contrary, yield spreads of the periphery relative to German Bunds have been falling since the ECB first hiked its policy rates," it said, adding that this might reflect that their economic fundamentals have improved significantly in the past year.
In the current cycle, the ECB made its first interest-rate rise last July. Strong real GDP growth and high inflation rates in the peripheral countries implied that their nominal GDP outpaced the growth of nominal government debt by a wide margin, J. Safra Sarasin said.
U.S. Markets:
Stock futures edged higher, as investors remained on edge ahead of the crucial inflation reading.
Stocks have rallied this year on hopes that slowing inflation will allow the Fed to switch to less aggressive monetary policy, though recent economic data has forced some investors to rethink those expectations.
The CPI is out at 13:30 GMT. Consensus forecasts are for a 0.4% monthly increase, and a 6.2% rise on-the-year.
Forex:
The euro-dollar exchange rate will be solely driven by U.S. inflation data given the absence of other major catalysts, ING said.
The second estimate of fourth quarter eurozone economic growth at 1000 GMT looks unlikely to impact markets while Gabriel Makhlouf is the only scheduled ECB speaker Tuesday, ING said.
EUR/USD may fall to 1.0650-1.0700 should core U.S. inflation come in at 0.4% or 0.5% month-on-month in January compared with 0.4% in December, ING said.
"Anything above that would likely trigger a larger contraction and [EUR/USD] 1.0600 should be tested."
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Sterling was little changed as investors assess the latest U.K. employment data.
The Bank of England may lift interest rates 25 basis points in March given little signs wage growth has peaked, ING said.
"But with the BOE putting greater emphasis on the lagged impact of past tightening, and with inflation likely to show signs of improvement by spring, we suspect a March rate hike will be the last."
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Today's inflation data are likely to show price pressures eased further in January but any dollar falls will be limited, UniCredit Research said.
The idea that U.S. inflation is decelerating is no longer a surprise so a potentially lower inflation print may not materially weaken the dollar with the DXY dollar index unlikely to fall much below last week's low of 102.63, Unicredit added.
An acceleration in inflation, however, would probably catch investors much more off guard, reinforcing expectations for the fed funds rate to peak well above 5%, it said.
"In this case, the DXY is set to potentially break towards 104 and above."
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The Polish zloty could weaken further given the risks facing the country, ING said.
The EU's Court of Justice will publish an opinion Thursday about the legal challenge by Polish borrowers over Swiss franc mortgages and this could impose additional costs on the banking sector, it added.
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Bonds:
Eurozone government bond yields fell ahead of U.S. inflation data, the main market driver of the day.
Methodology changes affecting components such as new cars and owners' equivalent rent create much more uncertainty around January data than in a usual month, Citi said.
"Considering the large sensitivity of [two-year Treasurys] and [two-year German] Schatz to U.S. inflation surprises, this added uncertainty, if realized, could spur rates of volatility today," it added.
Energy:
Oil prices fell about 1% after the U.S. said it would release 26 million barrels of oil from its reserves.
The release from the Strategic Petroleum Reserve adds to the record 180 million barrels sold last year to combat inflation and high oil prices following the war in Ukraine.
The latest sale is unrelated to that effort and was mandated by congress several years ago. Still, the Biden administration had reportedly planned to cancel the sale as it is seeking to refill stockpiles after last year's sales.
Russia
Russia's plan to cut its output by 500,000 barrels a day in response to Western sanctions is bolstering investors' bullish expectations on crude prices.
Disruption to Russian supplies is one of the key reasons most major investors have been betting oil prices will rise but so far the nation's oil output had been surprisingly resilient and oil prices have been rangebound.
The cut should tighten the oil market this year, UBS said.
"We remain most preferred on commodities and crude oil, and maintain our forecast for crude prices to rise above USD 100 per barrel this year," UBS Global Wealth Management said..
Metals:
Base metals prices were wavering, while gold edged higher, ahead of the inflation data release.
"The macro environment is sending mixed signals ahead of today's CPI inflation data," Peak Trading Research said.
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EMEA HEADLINES
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The U.K. unemployment rate stood at 3.7% in the fourth quarter, unchanged from the rate recorded in the three months through November, according to data from the Office for National Statistics released Tuesday.
Ford to Cut 3,800 Jobs in Europe in EV Shift
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The German industrial company reported adjusted earnings before interest and taxes for the three months through the end of December of 254 million euros ($272.5 million), compared with EUR378 million in the first quarter of fiscal 2022, on sales that slipped by EUR5 million to EUR9.02 billion.
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02-14-23 0631ET
