EMEA Morning Briefing : Stocks Poised to Rise as Rate Views Continue to Be Readjusted

MARKET WRAPS

Watch For:

Services PMI data for eurozone, Germany, France, Italy and UK; EU PPI; Germany foreign trade; France industrial production index; Italy GDP; UK official reserves; trading updates from Deutsche Bank, BBVA, RWE, Rightmove, Pearson, Evraz, Babcock International

Opening Call:

Shares in Europe are poised to extend their rise on Friday. In Asia, stock benchmarks were mixed; Treasury yields mostly fell; the dollar was softer; while oil dropped and gold gained.

Equities:

European stocks could continue climbing on Friday, as expectations for rates shift after Atlanta Fed President Raphael Bostic said he still very firmly supports raising interest rates in quarter-point increments.

Mr. Bostic said he is firmly in the camp that supports quarter-of-a-percentage-point interest rate hikes, though there is a case that could be made that the Fed will have to go higher than 5%-5.25% with its policy rate.

He also reportedly said the central bank could be in a position to pause its rate hikes sometime this summer.

Many investors say they are remaining cautious on stocks in the near term, given how much market sentiment has shifted based on the strength of economic data from month to month.

Stocks still look vulnerable to further declines, said AXS Investments, adding that it would be keeping a close eye on the release of consumer-price index data later in the month.

Forex:

The dollar lost ground in Asia amid improving risk appetite spurred by gains in most regional equity markets.

China's National People's Congress begins this weekend, and it should offer more evidence of growth-supportive measures, said SPI Asset Management.

It added that while higher-for-longer U.S. interest-rate dynamics will probably prevent a full-on revival of January's bullish yuan movements, some China proxy trades might be worth adding where the Australian dollar could be a prime beneficiary.

The dollar had been stronger earlier, following data showing a decrease in U.S. applications for unemployment benefits that suggests continued tightness in the labor market.

The data is the latest showing an economy that is continuing to chug along, despite the rapid pace of rate increases by the Fed over the last year, and adds to worries the central bank will continue raising rates.

"The economy is still looking robust and that should keep the Fed's hawkish speak going," Oanda said, also mentioning surging U.S. labor costs and record EU core inflation. "All eyes will be on Powell's semi-annual monetary policy report to Congress."

Bonds:

Treasury yields broadly retreated in Asia on Friday after advancing to new milestones the previous day.

Signs of continued U.S. labor market strength plus persistent inflation out of Europe were all it took on Thursday for bond investors to push yields up toward fresh milestones as interest-rate expectations continued to be readjusted.

"The market is expecting slightly higher rates for longer and that has pushed up bond yields," said State Street Global Advisors.

Markets are now pricing in a 73.8% probability that the Fed will raise its benchmark interest rate by another 25 basis points to a range of 4.75% to 5% on March 22, according to the CME FedWatch tool. The chances of a 50-basis-point hike this month were seen at 26.2%.

The central bank is mostly expected to take its fed funds rate target to at least 5.25%-5.5% by November, according to 30-day Fed funds futures. That's up since the start of the year, when traders were betting that this so-called 'terminal rate' would be below 5%.

Energy:

Crude oil prices fell as the prospect of further monetary tightening among global central banks offset signs of stronger demand in Asia, said ANZ.

ANZ cited ECB President Christine Lagarde suggesting that rate increases could extend beyond March, and Boston Fed chief Susan Collins saying that further interest-rate increases are needed to get inflation under control.

U.S. oil futures had settled at a two-week high on Thursday, marking their highest settlement in two weeks.

"Optimism surrounding China's economic recovery are offsetting more hot inflation data in Europe and the U.S.," which sparked further hawkish money flows in morning trade, said Sevens Report Research.

"Sticky high inflation" is going to prompt more action from the Federal Reserve and European Central Bank, and while that is a negative for demand expectations, the Chinese government is "simultaneously raising their growth outlook for 2023, and considerably so," it said. That's "being seen as a balancing factor for any economic slowdown in the West."

Metals:

Gold prices advanced after settling with a loss overnight.

Focus is now on the ISM Services index, which could provide some insight if the economy will come back to reality following a very robust January, and next week's Fed Chair Powell's semi-annual monetary report to Congress and the nonfarm payroll report, Oanda said.

"After struggling to digest last year's steep [interest] rate hikes, financial markets are having to re-price a more hawkish outlook again for 2023," said BullionVault.

The fact that the precious metal is holding firm, even as exchange-traded funds see small net outflows, "suggests central-bank demand has returned after the New Year price jump," BullionVault said. "It also highlights solid consumer demand, most especially from China."

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Aluminum gained in the Asian morning session amid the dollar's weakness.

Industrial metals, such as aluminum, have had a very strong inverse relationship with the greenback during the 12 months to February, and this relationship will probably continue to be an important driver of prices for industrial metals, Commonwealth Bank of Australia said.

China's upcoming "two sessions" political meetings will likely provide policy and economic targets for 2023, offering important signals for the outlook of the country's commodity-intensive sectors, it added.

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Chinese iron-ore futures edged higher, continuing gains for a fourth straight session.

Investors were optimistic in the lead-up to the National People's Congress, and iron ore's fundamentals are strong, Baocheng Futures said.

However, rising prices will likely trigger policy regulation, and demand is likely to fade, so investors should be cautious about their long positions, it added.

TODAY'S TOP HEADLINES

Fed Official Says Hotter Data Will Warrant Higher Rates

The Federal Reserve will need to raise rates to higher levels than previously anticipated to prevent inflation from picking up if the recent strength in hiring and consumer spending continues, a central bank official said Thursday.

"I would be very pleased if the data we receive on inflation and the labor market this month show signs of moderation," Fed governor Christopher Waller said in remarks posted on the Fed's website. "But wishful thinking is not a substitute for hard evidence in the form of economic data. After seeing promising signs of progress, we cannot risk a revival of inflation."

Fed's Bostic says he's firmly in quarter-point rate rise camp

Atlanta Federal Reserve President Raphael Bostic on Thursday said he is firmly in the camp that supports quarter percentage point interest rate hikes, saying that it was wise for the central bank to move cautiously.

"Right now, I'm still very firmly in the quarter-point move" camp," Bostic said, in a roundtable with reporters on Thursday.

Ukraine Military Holds Simulated War Exercises on U.S. Base

WIESBADEN, Germany-The U.S. is hosting members of the Ukrainian military here for a weeklong war-planning exercise, designed to help Kyiv game out its strategy against Russia in the next phase of their war.

Dozens of members of the Ukrainian military are participating in what is often referred to as a wargame or a tabletop exercise, held at a U.S. military base to give the Ukrainian forces an opportunity to assess their next courses of action in the war, now in its 13th month.

Ericsson to Pay About $207 Million After DOJ Finds It Breached Deal

Ericsson AB has agreed to pay $206.7 million in a foreign bribery settlement with the U.S. Justice Department, which found the telecommunications company had breached an earlier deal.

Stockholm-based Ericsson will plead guilty to the original charges it faced following its breach of a 2019 deferred prosecution agreement, the Justice Department said Thursday.

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Expected Major Events for Friday

00:01/UK: Feb BRC-Sensormatic IQ Footfall Monitor

01:01/IRL: Feb Ireland Services PMI

07:00/TUR: Feb CPI

07:00/TUR: Feb PPI

07:00/GER: Jan Foreign Trade

07:45/FRA: Jan Industrial production index

08:00/CZE: 4Q GDP

08:00/SVK: 4Q Labour Force Sample Survey: Employment & unemployment

08:00/SVK: 4Q Average monthly wage of employees

08:15/SPN: Feb Spain Services PMI

08:45/ITA: Feb Italy Services PMI

08:50/FRA: Feb France Services PMI

08:55/GER: Feb Germany Services PMI

09:00/EU: Feb Eurozone Services PMI

09:00/ITA: 4Q GDP

09:30/UK: Feb UK Official Reserves

09:30/UK: Feb S&P Global / CIPS UK Services PMI

09:30/UK: 4Q Bank of England external business stats

10:00/EU: Jan PPI

10:00/CYP: Feb Registered Unemployed

10:00/CYP: Feb CPI

11:00/IRL: Feb Irish Live Register latest monthly figures

11:00/IRL: 4Q GDP

11:00/IRL: 4Q Balance of Payments

All times in GMT. Powered by Onclusive and Dow Jones.

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This article is a text version of a Wall Street Journal newsletter published earlier today.

(END) Dow Jones Newswires

03-03-23 0016ET