MARKET WRAPS
Stocks:
European stocks struggled for traction again on Friday as investors look towards the U.S. nonfarm payrolls data later today.
The December Payrolls report provides a more definitive snapshot of the US labour market. Still, this week’s trifecta of positive labour data points only raises the importance of Friday’s Jobs report, SPI Asset Management said.
“Given what we are seeing currently in the US jobs market, there appears little incentive for the Fed to slow its current policy which means we could well see at least another 100bps of rate hikes by the end of Q1,” CMC Markets said.
Stocks to Watch
Shell said it expects its fourth-quarter earnings to take a $2 billion hit from additional taxes in the European Union and the U.K. government’s energy windfall tax as its integrated gas trading and optimization results rose on quarter.
Read more here
Read Shell Expects Natural-Gas Profit Rebounded in Fourth Quarter
2023 Recessions
In 2023, the U.S. and European economies should see a transition toward normality after a series of shocks in the past three years, Berenberg said.
However, this doesn’t mean that these economies will return to the times of ultra-low inflation and rock-bottom interest rates, but instead are likely to experience cyclical ups and downs and more-volatile inflation, Berenberg added.
The transition is likely to be bumpy as the Federal Reserve’s interest-rate increases will likely push the U.S. into a mild recession while most European economies already started to contract in late 2022, Berenberg said.
After short recessions, both the U.S. and Europe should see a rebound in economic activity, it added.
Central Banks Vs Inflation
While the peak in headline inflation has seemingly passed, “the central banks can’t yet declare a win over inflation,” Danske Bank said, adding that this implies further policy tightening is warranted.
Headline inflation is set to move lower through most of 2023, given declining producer prices and base effects, but core inflation is set to be sticky at a higher level, Danske said.
U.S. Markets:
Stock futures ticked higher ahead of labor-market data that will offer a signal about the outlook for the U.S. economy and the trajectory of interest rates.
Contracts tied to the S&P 500 advanced 0.2%, while Dow industrials futures added 0.1%. Nasdaq-100 futures gained 0.1%.
Most government bond yields rose. The 10-year Treasury yield rose to 3.729%, from 3.720% Thursday.
The two-year yield, which more closely reflects interest-rate expectations, rose to 4.471%, its highest since late November.
Other economic updates set for release today include the ISM services index for December and factory orders for November.
Fed speakers throughout the day include Atlanta Fed President Raphael Bostic; Fed Gov Lisa Cook; Richmond Fed President Tom Barkin; and Kansas City Fed President Esther George.
Forex:
ING expects the pound to remain weak and said strong U.S. jobs data could see it drop towards $1.1780.
Sterling “fell quite hard” as the dollar strengthened on Thursday, ING said.
ING pointed to evidence of a falling number of U.K. firms finding it harder to recruit staff, which “could be a leading indicator for softer wage growth,” although for now the market is still pricing in 100-125 basis points of U.K. rate increases for late summer.
“On balance, we expect sterling to remain soft,” ING added, but noted that a fall to $1.1650 is unlikely.
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The dollar rose to a four-week high against a basket of currencies awaiting the release of U.S. monthly jobs data, which could, if strong, increase expectations for how much more the Fed will need to raise interest rates.
Bonds:
Yields
In the coming quarters, long yields will be particularly dependent on shifts in the current rate of inflation, Danske Bank said.
A further factor will be whether the European Central Bank and the U.S. Federal Reserve begin to signal that peak interest rates are close at hand or indeed have already been reached, the bank added.
“We believe the Fed is closer to signaling an end to policy tightening than the ECB and foresee cuts from the major central banks only in 2024.”
Corporate-Bond Market
Defaults in the corporate-bond market could be higher than expected in the fiscal year 2023/24 as economic growth slows and a high number of bonds are due to mature during that period, Aperture Investors said.
“Default rates will end higher over 2023/24 than the market expects due to [the] severity of the economic downturn, 2024 maturity walls, and the low quality of credit fundamentals in the leveraged loan market.”
Austrian-German Yield Spread
The 10-year Austrian-German government bond yield spread, measured between the 0.90% February 2032-dated Austrian bond and the 0% February 2032-dated German Bund, has tightened toward the 60 basis points area and is expected to stay there, UniCredit Research said.
“In our view, the RAGB [Austrian government bond]-Bund spread will remain around this level in the coming months.”
Economic uncertainty and the prospect of further tightening by the ECB, in terms of upcoming depo rate hikes and quantitative tightening, “will likely prevent the spread from tightening substantially in the near future,” UniCredit said.
Read Austria Leaps in Annual Bond Funding Completion
Read German Bund Yields Edge Higher After Eurozone Inflation Data
Energy:
Oil prices were little changed in Europe and on course to end the week sharply lower thanks to demand concerns.
Saudi Aramco’s decision to cut its selling prices Thursday only added to concerns about demand, Saxo Bank said.
The first week of 2023 “confirms our view about a challenging Q1 before demand eventually recovers as the Covid cloud starts to lift in China,” Saxo Bank added.
Metals:
Metal prices were moving higher in early trading, helped by a weaker dollar and struggles over supply.
Prices have been helped by a weaker dollar and expectation of tight supply, according to Fitch Solutions.
Despite the rise in coronavirus cases, “we expect metal prices to remain elevated in 2023,” Fitch said.
Copper Outlook
China reopening and restricted supply from Latin America is likely to boost prices for copper in 2023, Fitch Solutions said, revising its 2023 copper price outlook to $8,500 a metric ton from $8,400 a ton as it expects “a rebound in Mainland Chinese copper demand to boost prices along with a weakening U.S. dollar.”
China’s move away from zero-covid should boost demand for all industrial metals, with stimulus measures being put in place within the country’s construction sector, it said.
Similarly, price support is likely to be found from operational issues from producers in Latin America with labor strikes and community issues in Peru and Chile likely to continue affecting primary supply, Fitch added.
DOW JONES NEWSPLUS
EMEA HEADLINES
Warmer Weather Helps Ease Europe’s War-Driven Inflation Surge
Lower energy costs as Europe enjoys a mild start to winter have helped slow the eurozone’s annual rate of inflation to single digits, but consumer prices are still rising too quickly for policy makers at the European Central Bank, who have signaled they intend to raise their key interest rate again in the near future.
A surge in energy prices in the months following Russia’s invasion of Ukraine pushed eurozone inflation sharply higher, and above its U.S. equivalent from midyear, but warmer-than-usual temperatures and government caps helped reverse that move as the year drew to a close.
Shell to Take $2 Bln Tax Hit for 4Q as Integrated Gas Trading Soared
Shell PLC said Friday that it expects to take a $2 billion hit for the fourth-quarter from additional taxes in the European Union and the U.K. government’s energy windfall tax, and that its integrated gas trading and optimization results significantly rose on quarter.
Recently announced additional taxes in the European Union, and the deferred tax hit from the increased U.K. government’s energy profits levy are expected to amount to around $2 billion for the fourth quarter.
The company said the taxes and levies will be reported as identified items, and so won’t affect fourth-quarter adjusted earnings. They will have a limited cash hit in the fourth quarter given the expected timing of payments.
German Factory Orders Fell in November to Lowest Level Since July 2020
New orders at German factories declined sharply in November to their lowest level in more than two years, a sign of weakening demand for the country’s key manufacturing sector as the economy cools.
Factory orders fell 5.3% on month in November, swinging from a 0.6% rise in October, according to price-adjusted data from the German statistics office Destatis released Friday. New orders declined in eight of the 11 months up to November, and currently stand at their lowest level since July 2020.
U.S., Allies Say Armored Vehicles Will Give Ukraine’s Troops an Edge
The U.S., France and Germany have said they will send dozens of armored infantry vehicles to Ukraine, a significant deployment of Western support at a critical juncture in its war against invading Russian forces.
President Biden said Thursday that the U.S. would provide Bradley Fighting Vehicles, a tracked vehicle that resembles a tank but with a smaller gun, fulfilling months of requests from Kyiv. The Bradleys are part of a new military-aid package-which officials said they expected to outline formally Friday-that would include other munitions, vehicles and weaponry.
GLOBAL NEWS
Fed Official Sees Progress on Inflation, Says More Rate Rises Needed
The Federal Reserve’s short-term benchmark rate isn’t yet at a level high enough to sufficiently slow the U.S. economy to combat high inflation, but it should get there this year, a central bank official said Thursday.
(MORE TO FOLLOW) Dow Jones Newswires
January 06, 2023 06:10 ET (11:10 GMT)
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