MARKET WRAPS
Watch For:
EU construction output, flash consumer confidence indicator; Germany Bundesbank monthly report; trading updates from Anglo American Platinum, Evraz
Opening Call:
Shares could open in positive territory in Europe on Monday. In Asia, stock benchmarks were mixed; the dollar was steady; oil advanced, while gold was flat.
Equities:
European stocks could rise Monday, recovering from Friday's losses amid worries over the interest-rate outlook in the U.S. and elsewhere.
"With markets now pricing in another 25 basis-point hike at each of the next three FOMC meetings, investors have begun scaling back exposure in anticipation of a potential market pullback," IG said.
Economists at Bank of America and Goldman Sachs have adjusted their forecasts to include additional 25 basis-point hikes in March, May and June. That would bring the Fed's terminal rate to a range of between 5.25% and 5.5%.
The backdrop for stocks has gotten cloudier in recent sessions as surging wholesale prices signaled that inflation could continue to be slow to retreat in the U.S.
Several Fed speakers also pointed anxiously to inflation that isn't retreating fast enough, triggering concern in markets that the Fed might need to fire off more rate hikes and keep them in restrictive territory for longer than initially anticipated.
The Fed probably won't cut rates until it has "squeezed inflation out of the system for good," said Barings. "The second-to-last thing the Fed wants to do is to cause a deep recession," it said. But "the last thing they want to do is to cut rates and then have inflation take off on them again."
Barings said it expects "a couple more" interest rate hikes from the Fed and then for the central bank to hold rates at that level most likely through the end of 2023. That's because inflation will probably come down "more slowly and more erratically over the next few months," it explained.
Forex:
The U.S. dollar was steady and could be range-bound amid the Presidents Day holiday in the U.S. Trading volumes in the foreign-exchange market are expected to be light given the U.S. holiday, RBC Capital Markets said.
Focus for this week is likely to be on the FOMC minutes due Wednesday.
The dollar could track higher this week given the recent bout of positive U.S. economic surprises, said Commonwealth Bank of Australia.
However, eventually, that economic outperformance will fade as the economy shows more strain from interest-rate rises.
Consequently, CBA expects the dollar to give up its recent gains, although that is unlikely to happen this week. The U.S. economy isn't undergoing a soft or a hard landing, because there is no landing that can be seen at all, it added.
Bonds:
U.S. bond markets are closed Monday in observance of Presidents Day.
Traders have begun to price in some possibility of a half-percentage-point rise in the fed funds rate in March after Thursday's wholesale-prices data, along with remarks by Cleveland Fed President Loretta Mester and St. Louis Fed President James Bullard. Their colleague, Richmond Fed President Tom Barkin, told reporters on Friday though that he is sticking by smaller, quarter-point increments in the future, however.
Meanwhile, Bank of America and Goldman Sachs were among the firms that added a June rate hike to their forecasts.
On a global basis, "longer-term inflation expectations mostly remain anchored but that does not prevent stickiness in inflation over the next few years. Elevated one-year-ahead inflation expectations mean core inflation may be hard to bring back to target quickly," said BofA Securities.
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Gilt yields remain volatile as investors analyze the latest inflation and labor market data "to refine their estimates of where, and when, [the] bank rate might peak," said HSBC.
This week's gilt supply will be relatively heavy due to the two planned sales by the Bank of England under the quantitative tightening program and two gilt auctions by the U.K. Debt Management Office.
Energy:
Oil rose in Asia in a likely technical rebound following mild losses earlier, though gains may be capped.
The global economic backdrop has weighed on sentiment in the crude-oil market, ANZ Research said, noting that inflation remains too high.
The U.S. government's recent announcement that it plans to sell 26 million barrels of oil from the Strategic Petroleum Reserve was also tempering expectations of stronger demand in China, it added.
"Oil is seeing steady selling pressure and the true test will be if prices can break below the $72.00 a barrel level," Oanda said.
Metals:
Gold was barely changed after falling earlier on a stronger dollar amid a hawkish Fed rhetoric.
Further downside should be limited for now as central banks appear poised to increase their bullion holdings, Oanda said.
"Global recession risks are returning and that should lead to some safe-haven flows for gold," it said.
Looking ahead, "precious metals are likely to remain a trader's market until the economic data or geopolitical picture changes," BullionVault said. "Gold looks rangebound by strong but slower inflation and soft but continued growth."
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Aluminum rose amid supply-side issues.
There have been more production cuts in China's Yunnan province due to the lack of hydro power, Citi Research said.
According to Citi's industry discussions, power distributor China Southern Grid had ordered some smelters to reduce production by an additional 415 kilotons of aluminum capacity from Feb. 18.
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Chinese iron-ore futures were higher, extending last week's rally, amid increasing demand and positive fundamentals.
The output from steel mills is increasing, as demand from the downstream sector improves, lifting the demand for iron ore, Nanhua Futures said.
Integrated iron and steel plants are recovering from losses and breaking even, which is likely to provide strong support for iron prices.
TODAY'S TOP HEADLINES
Workers' Pay Globally Hasn't Kept Up With Inflation
Wage growth across advanced economies is plateauing or declining from high levels. For central banks, it is good news: There are no signs of a spiral in which wages push up prices, which push up wages again. That makes it more likely inflation could decline without a significant increase in unemployment.
For workers, though, it is less positive. Wages rose faster last year than in the previous two years, but not as much as prices across major advanced economies, according to projections by the International Labour Organization. Workers' purchasing power-their average inflation-adjusted wage-was lower last year than in 2019, before the pandemic, according to the report. So despite strong demand for workers and ultralow unemployment, labor's share of economic output shrank in many advanced economies.
Going Private Again Is All the Rage Among Newly Public Companies
A growing number of newly public companies are racing back to private ownership after discovering that an IPO isn't always all it's cracked up to be.
Of the hundreds of companies that went public in the boom years of 2020 and 2021, 10 have already agreed to sell themselves to private-equity firms, according to Dealogic. Of those that went public in 2018 or 2019, only eight have gone private in the ensuing years.
U.N. Inspectors Detect Near-Weapons-Grade Enriched Uranium in Iran
United Nations atomic agency inspectors have detected uranium that has been enriched to near weapons-grade in Iran in recent weeks, three senior diplomats said Sunday, a finding that will deepen concerns about Tehran's nuclear ambitions.
Iran has been producing highly enriched, weapons-grade material of 60% purity since early 2021, but the material found was of 84% purity, according to the diplomats. Weapons-grade enriched uranium is generally considered to be from around 90%-enriched uranium.
U.S. Warns China Against Supplying Arms to Russia in Ukraine War
U.S. officials are warning China against supplying Russia with arms and ammunition, as Moscow struggles to gain ground in Ukraine despite deploying almost the entirety of its ground forces in its smaller neighbor.
Concerns that China was considering providing lethal assistance to Russia first surfaced in meetings between officials late last year and early this year, officials said. U.S. officials put their Chinese counterparts on notice in videoconferences and at in-person meetings that China is "nearing a red line" in assisting Russia's war, the officials said.
Chinese Drones Still Support Russia's War in Ukraine, Trade Data Show
More than a year after Western authorities sought to shut down the pipeline supplying Russia in its war in Ukraine, exports of small, nimble Chinese drones are still providing the Kremlin with an effective way to target Ukrainian forces, according to Western officials, security analysts and customs data.
Some of the commercial drones are arriving on the front lines from Russian distributors supplied by Shenzhen, China-based Da-Jiang Innovations Science & Technology Co., known as DJI, according to customs records, while others are transported through the United Arab Emirates.
Thousands of Ukrainians in U.S. Risk Losing Legal Status in April
Thousands of Ukrainian immigrants living in the U.S. are at imminent risk of losing their legal status because they entered the country in a brief window during which the U.S. government didn't have a long-term plan in place to receive them.
Last year, in the first months following Russia's invasion of Ukraine, tens of thousands of Ukrainians with family or friends in the U.S. flew to Mexico, hoping they might be allowed to enter the U.S. from there.
Facebook Parent Launching 'Meta Verified' Subscription Service
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(MORE TO FOLLOW) Dow Jones Newswires
02-20-23 0019ET
