MARKET WRAPS
Watch For:
EU meeting of eurozone finance ministers; GDP data for EU, Germany, France, Italy; Provisional CPI for Germany, France; Germany labour market statistics; France consumer spending, PPI; Italy industrial turnover; trading updates from Mercedes-Benz, Eni SpA, OMV, NatWest Group, Sberbank, Danske Bank, Pearson, Hikma Pharmaceuticals, Smurfit Kappa Group, Renishaw, Remy Cointreau
Opening Call:
European stock futures are higher, signaling gains on strong earnings as the results season continues. In Asia, stock benchmarks mostly gained; Treasury yields were mixed; the dollar strengthened; oil futures advanced while gold fell.
Equities:
European shares look poised to gain Friday, after another batch of strong big-tech earnings reports yesterday helped boost the broader market in the U.S. while offsetting signs of slowing economic growth.
"You're seeing surprises, you're seeing beats," said Rob Haworth, senior investment strategist at U.S. Bank Asset Management.
"Not an unequivocally great story, but we're not down as much as people were thinking."
While reported earnings have topped expectations by 8% on average, the positive surprises may not last as the year progresses, said Liz Young, head of investment strategy at SoFi.
Companies are still reporting revenue growth, but profit margins are falling. "If we want inflation to come down, earnings come down with that," she said.
Seema Shah, chief global strategist at Principal Asset Management notes that the stock market rally has been "very narrow" and may not be sustainable.
This stock market seems to be expecting both that the U.S. can avoid a recession and that the Federal Reserve will later this year pivot from its interest-rate hiking campaign and begin cutting interest rates, Shah said.
But the Fed tends to cut rates because of a recession or a crisis, she said, which probably wouldn't bode well for equities.
New data Thursday showed U.S. growth was weaker than expected in the first quarter. On the other hand, the Federal Reserve's preferred inflation gauge came in at 4.9%, which was hotter than expected and up from 4.4% in the fourth quarter.
The inflation news solidified investor expectations for another interest-rate increase when the Federal Reserve meets next week. Fed-fund futures implied a roughly 83% chance that the central bank raises interest rates by 0.25 percentage point at the meeting, up from 72% Wednesday.
Read: Fed pivot may not mean a stock market rally, says David Rosenberg
Forex:
The dollar gained in Asia as odds on a hike at coming Wednesday's Fed meeting increased.
The U.S. economy grew more slowly than expected in 1Q but below-the-headline details imply consumer spending remained strong, Corpay's Karl Schamotta said, even as the Fed continued its tightening campaign.
The chief market strategist also noted that initial claims for unemployment benefits fell, "providing more evidence of still-strong growth momentum."
Schamotta points to personal income and spending data due later in the day that should provide further insight into the handoff into 2Q.
Bonds:
Treasury yields were mixed in Asia after a raft of U.S. data prompted traders to price in greater chances of interest-rate hikes by the Federal Reserve next week and in June.
"The disappointing 1.1% annualized rise in first-quarter GDP indicates that the economy had less forward momentum at the start of this year than previously thought. We continue to expect the drag from higher interest rates and tightening credit conditions to push the economy into a mild recession soon," said Andrew Hunter, deputy chief U.S. economist for Capital Economics.
"Overall, the data confirm the message from other indicators that while economic growth is slowing, it isn't yet collapsing," Hunter said.
"Nevertheless, with most leading indicators of recession still flashing red and the drag from tighter credit conditions still to feed through, we expect a more marked weakening soon."
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An uncertain economic outlook is likely to keep U.K. gilt yields volatile in the near-term, HSBC said.
Nonetheless, gilt yields could fall in the second half of 2023 as markets start to expect a pause in Bank of England rate increases, it said.
"We think markets will gradually assign a higher probability to the possibility of a hard landing in the coming months," it said.
"This should be supportive for lower gilt yields," HSBC added.
Energy:
Oil futures were higher early Friday continuing their uptrend.
Focus is on the implications of U.S. GDP data released overnight, which showed slow growth in 1Q amid still-high inflation and rising interest rates, fanning worries about recession.
There was a bright spot in consumption, which rebounded during the quarter, Oanda said.
The mixed data could lend support to crude, underlining "the case for the Fed to remain in tightening mode," it said.
"While it is possible that the April highs were a head fake or false breakout, for now we still expect WTI to stabilize near previous 2023 support in the low $70s and potentially rebound to form a new trading range centered around the upper $70s as the fundamental backdrop is reassessed," analysts at Sevens Report Research said.
Metals:
Gold futures edged lower in Asia, retreating from its recent rise as investors saw the potential of another Fed rate hike.
While the uncertain economic backdrop helped push gold above $2,000/oz, the high inflation has seen expectations of further rate hikes rise, putting downward pressure on the precious metal, ANZ analysts said.
Gold's "corrective to consolidative bias" is likely to prevail ahead of next week's Federal Reserve Open Market Committee policy decision, "but with the downside being limited by banking sector worries," said Peter Grant, vice president and senior metals strategist at Zaner Metals.
"A significant escalation of the banking crisis could trigger the next leg higher in gold to challenge the all-time high," as it would also tamp down rate-hike expectations. he said.
Macroeconomic data in the U.S. has sent mixed signals for how the Fed may act in the coming months, and the market likely lacks "clear clues" on tightening expectations, Saxo Bank said.
Higher interest rates typically weigh on gold and silver buying demand.
But a brighter outlook could emerge once it becomes clearer when the Fed will stop raising interest rates, as peaking rates are historically followed by a strong precious metals rally, it added.
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Copper futures edged higher early Friday on possible dip-buying.
Opportunistic buyers appear to have helped boost copper prices after they fell to a four-month low, ANZ Research analysts said.
However, the U.S. GDP chain-weighted price index released Thursday indicated inflation was stronger than initially expected, which has spurred concerns of further Fed rate increases that weigh on sentiment, the analysts added.
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Chinese iron-ore futures were slightly lower, extending the broad selloff seen in recent weeks.
Analysts pointed out that the steelmaking ore likely faces a range of negative factors, including Chinese officials' indication of crackdown on price speculation and weak real-estate construction activities--a main source of steel and iron-ore demand in China.
The double hit may be particularly damning and could weigh on trading sentiment in the near term, Galaxy Futures analysts said.
Given an unclear outlook on when China's property industry could more meaningfully improve, the analysts reckoned that the iron-ore price downturn may drag on in the near term.
TODAY'S TOP HEADLINES
There's 'a disconnect' between stock-market rally and Fed pivot expectations
This year's stock market rally has been "very narrow" and may not be sustainable, according to Seema Shah, chief global strategist at Principal Asset Management.
U.S. stocks rose sharply Thursday, bringing the S&P 500 index's gains this year to 7.7% despite a slowing economy, according to FactSet data. The U.S. economy expanded at a soft 1.1% annual pace in the first quarter, slower than Wall Street analysts' forecast for 2% growth in gross domestic product.
China Ratchets Up Pressure on Foreign Companies
Chinese authorities have embarked on a campaign to bring foreign businesses to heel, just months after Beijing delivered an open-for-business message to global investors.
In recent weeks, Chinese authorities have questioned staff at consulting firm Bain & Co.'s Shanghai office in a surprise visit, launched a cybersecurity review of imports from chip maker Micron Technology Inc., detained an employee of Japanese drugmaker Astellas Pharma Inc. and raided the Beijing office of U.S. due-diligence company Mintz Group.
Democrats Reject Starting Talks on Debt Ceiling
WASHINGTON-Democrats continued to say that the nation's borrowing limit must be raised without conditions, waving away Republican demands to begin talks after the House passed a bill coupling an increase in the debt ceiling with sharp spending cuts.
House Speaker Kevin McCarthy (R., Calif.) said the legislation showed Republicans are unified on a plan and that President Biden now needs to come to the table. But the White House and top Democrats said they wouldn't budge on their stance that Congress should pass a "clean" debt ceiling with no conditions attached before moving on to any talks on fiscal policy.
Europe to ChatGPT: Disclose Your Sources
Makers of artificial-intelligence tools such as ChatGPT would be required to disclose copyright material used in building their systems, according to a new draft of European Union legislation slated to be the West's first comprehensive set of rules governing the rollout of AI.
(MORE TO FOLLOW) Dow Jones Newswires
04-28-23 0015ET
