MARKET WRAPS
Watch For:
Manufacturing PMI for eurozone, U.K., France, Italy Germany; U.K. nationwide house price index, Money and credit; Germany CPI, Labour market statistics, Deutsche Bundesbank Annual Report press conference with President Joachim Nagel; Italy GDP; trading updates from Sberbank, Harmony Gold Mining, Reckitt Benckiser Group, Persimmon, Weir Group, Just Eat Takeaway.com, SEB, Ryanair Holdings, SKF, EDP, Cellnex Telecom, Puma, Beiersdorf
Opening Call:
Shares are set to inch higher in Europe on Wednesday. In Asia, stock benchmarks gained following strong China PMI data; Treasury yields were mostly higher; the dollar was unchanged; while oil and gold advanced.
Equities:
A cautious open higher is seen for European stocks on Wednesday, amid investor concerns that high inflation is proving sticky in developed economies, forcing bond yields higher.
Jason Pride, chief investment officer for private wealth at Glenmede, said the retreat in stocks in February was consistent with his view that a recession would hit the U.S. later this year-and that stocks had further to slide.
"Our view is that the market still isn't reflecting the potential risk of a recession," he said.
"I think the retail customer is going to be the focus this week," said Brian Overby, senior market strategist at Ally.
"The fact that we have such a resilient consumer has really kept the markets at bay," Overby said.
"The growing realization through February was that actually the U.S. economy is not responding sufficiently to the Fed hikes" so far, said Seema Shah, chief global strategist at Principal Asset Management.
"And that has meant that the labor market has continued to tighten and that, as a result, inflation pressures are still hot and heavy and simply not likely to decelerate."
Remaining pessimistic about U.S. stocks, Shah added that while the Fed had early success in bringing year-over-year inflation down from its peak of 9.1% in June to 6.4% in January, the next leg lower may be a harder battle.
Federal Reserve Bank of Chicago President Austan Goolsbee in his first speech as leader of the Chicago Fed said it is a danger and a mistake for policy makers to rely too heavily on market reactions.
The voting member of the interest-rate-setting FOMC also said Fed officials shouldn't rely solely on economic data releases, such as jobs and inflation readings, that come out with a delay.
"It can be hard to get a clear picture of what is going on. So, it's important to supplement these traditional data with observations on the ground from the real economy," he said.
Forex:
The dollar was unchanged early Wednesday, amid improving risk appetite following this morning's strong February PMI data out of China.
The official manufacturing PMI, official non-manufacturing PMI and Caixin manufacturing PMI were uniformly robust, suggesting a strengthening economy emerging from under the pandemic and zero-Covid strictures, said RBC Capital Markets.
The dollar has strengthened lately on terminal-rate expectations, but once markets get more clarity on the Fed's rate path at the March and May FOMC meetings, attention will turn overseas, Silicon Valley Bank said.
It sees parallels between February and last year, when rising terminal-rate expectations supported the dollar. Later in 2022, when expectations stopped increasing, USD started giving up gains.
Unexpectedly hot inflation readings in France and Spain align with the notion that inflation will be elevated for longer and "basically cement a 50 basis point hike in March for the ECB," which it said is running six to nine months behind the Fed.
Bonds:
U.S. treasury yields were broadly higher, as signs of stubborn inflation in Europe increased concerns that central banks will continue tightening monetary policy.
Data and fedspeak are likely to keep moving Treasury markets, but yields may have reached their peak, Spartan's Peter Cardillo said.
"Technically speaking, this is the second time over the past week that a retracement from their highs has occurred," he said.
"We therefore think that yields may have reached a near-term top."
Markets are pricing in a 76.7% probability that the Fed will raise interest rates by another 25 basis points to a range of 4.75% to 5% on March 22, according to the CME FedWatch tool.
The central bank is mostly expected to take its fed-funds rate target to between 5.25% and 5.5%, or higher, by September, according to 30-day fed funds futures.
"The longer rates remain high, the greater the real economic impact on both households and companies," said BMO Capital Markets.
"Particularly as the borrowing executed at much lower rates over the better part of the last three years need[s] to be refinanced, higher debt costs in an elevated inflationary environment serves as reminder that the cushion of easy access to capital has been removed."
Energy:
Oil futures rose in Asia, reversing earlier losses.
"With the release of key Chinese economic data this week, expectations of a strong economic recovery in China support price gains, despite concerns over U.S. interest rate hikes on the economy," OCBC analysts said.
CBA said that developments related to Russia's seaborne oil and refined-product exports would be watched closely by traders.
"The big question for oil markets in coming months will be the extent that Russia's oil and refined product exports are upended."
"Oil could surely rally given the right headlines, but beyond the near term the most- likely path of least resistance is lower for oil in 2023 as the threat of recession looms," analysts at Sevens Report Research said.
Oil bears remain in charge of the market at the current levels, said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.
"But solid support is expected before the $70 [per barrel] level, as -- like it or not -- the global oil supply remains tight, China reopens, demand increases and Americans will have to refill their reserves," the analyst said.
Metals:
Gold was slightly higher early Wednesday, after logging the largest monthly percentage decline in 20 months in February.
The strength of buying momentum toward the haven metal is unclear, with gold futures posting their first monthly drop since October.
Oanda sees support at $1,780-$1,800, and reckons that how gold reacts to this level could be a strong indicator of sentiment toward the precious metal ahead of key data releases.
Chintan Karnani, director of research at Insignia Consultants, pointed out that the market will see February U.S. employment numbers and February U.S. inflation numbers before the March 22 policy decision from the Federal Open Market Committee.
"Expect the unexpected in the next four weeks," he said.
"Herd reaction will be very violent to news, technical breakout, technical breakdown in precious metals and base metals."
Traders' reactions lately have been "very wild to so-called economic surprises and policy surprises," said Karnani.
"Stop-losses tend to get triggered on both the buy side and sell side on a given day."
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Copper and aluminum prices rose in Asia amid positive market sentiment.
The upbeat mood was triggered by Chinese data showing the official PMIs measuring China's factory, services and construction activities rebounding strongly for February.
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Chinese iron-ore futures rose early Wednesday.
There are expectations of a recovery in demand ahead of the peak construction period in China, ANZ Research analysts said.
Market participants are also anticipating further support for the sector at this week's 'Two Sessions' meeting in Beijing, the analysts added.
TODAY'S TOP HEADLINES
China's Official Manufacturing PMI Gained in February
The official gauges of China's factory, services and construction activities rebounded strongly in February, shaking off the impact of Covid after Beijing reopened the economy late last year.
China's official manufacturing purchasing managers index rose to 52.6 in February from January's 50.1, said the National Bureau of Statistics on Wednesday. The result beat the 50.5 expected by economists polled by The Wall Street Journal.
Austan Goolsbee Says Fed Shouldn't Rely on Financial Markets for Economic Clues
Federal Reserve Bank of Chicago President Austan Goolsbee stressed that central bankers need to focus on what is happening in the economy and not in financial markets as they consider the best path forward for monetary policy.
"The temptation can be to look at what's easy to find and lean more on that-stock market, bond market and other financial data that give instant reactions to news about the economy and our policy announcements and tell us which way the markets want the Fed to move," Mr. Goolsbee said Tuesday in his first speech as leader of the Chicago Fed. "But it is a danger and a mistake for policy makers to rely too heavily on market reactions."
House Passes Bill Taking Aim at ESG Investments
The House passed a Republican-led bill Tuesday disapproving of a new Biden administration regulation that would allow retirement-plan managers to consider climate change and other factors when they make investment decisions.
The legislation to overturn the regulation on environmental, social and governance guidelines, or ESG, passed 216-204. One Democrat joined with Republicans in support of the measure, which was introduced by Rep. Andrew Barr (R. Ky.).
U.S. Aims to Chart New Course for Chip Industry
WASHINGTON-The Commerce Department on Tuesday kicked off the application process for semiconductor manufacturing subsidies under the $53 billion Chips Act, along with conditions aimed at advancing some of the Biden administration's priorities.
The program serves as a test of Washington's ability to invigorate and chart a future course for the semiconductor industry that was forged in the U.S. but in recent years has moved much of its manufacturing overseas.
Ram Truck Brand Considers Expansion to More Markets Outside U.S.
(MORE TO FOLLOW) Dow Jones Newswires
03-01-23 0014ET
