MARKET WRAPS
Watch For:
Eurozone Trade Balance; Germany Annual GDP; France CPI; U.K.
Index of Services, Monthly GDP Estimates, Trade, Index of
Production, NIESR Monthly GDP Tracker; Christine Lagarde speaks;
updates from Sberbank, Babcock, Experian, Currys
Opening Call:
Likely aggressive tightening in the U.S. following more hawkish
comments from a batch of Fed officials will drag on European
stocks. In Asia, shares were deep in the red, with the dollar
weakening further but Treasury yields moving higher. In
commodities, oil extended its losses but gold rebounded.
Equities:
European shares face steep losses on Friday after more hawkish
remarks from Federal Reserve officials and as U.S. stocks ended
lower following Big Tech's skid.
Federal Reserve Gov. Lael Brainard testified Thursday that
"inflation is too high" as part of her nomination hearing to become
the vice chair of the institution.
"Our monetary policy is focused on getting inflation back down
to 2% while sustaining a recovery that includes everyone," Brainard
also said in prepared testimony delivered before the Senate Banking
Committee. "This is our most important task."
The Fed's rate-setting committee "has projected several hikes
over the course of the year. We will be in a position to do that as
soon as asset purchases are terminated," said Ms. Brainard. "And we
will simply have to see what the data requires over the course of
the year."
Hot inflation and a very robust labor market point to "a fair
amount of tightening in 2022" when it comes to monetary policy,
said Patrick Harker, the president of the Philadelphia Fed, on
Thursday.
Equally hawkish comments from the Fed's Christopher Waller and
Charles Evans firmed traders' expectations that U.S. interest rates
could rise as many as four times this year, beginning as soon as
March.
U.S. stocks closed down on Thursday, as a rebound in technology
shares stalled out, snapping a three-day winning streak for
Nasdaq.
Growth shares, which are more sensitive to interest rates,
bounced back, but the tech-heavy Nasdaq ended lower, halting a
recovery in the past three sessions.
"This is a reacceleration of last week's trade after the three
day reprieve," said Tom Hearden, senior trader at Skylands Capital,
citing an almost 20% move in value versus growth in 2022 so far.
"That's a spectacular move in nine trading days."
Economic Insight:
New waves of Covid-19 infections, labor shortages and
supply-chain challenges and inflation are driving a slowdown in
global economic growth, according to the United Nations, which
expects global output to increase by 4% in 2022 and 3.5% in 2023.
That would be down from the 5.5% expansion in 2021, the highest
rate of growth in more than four decades.
Africa and Latin America and the Caribbean are expected to see
significantly lower growth, compared with pre-pandemic projections,
while GDP per capita in developed economies is expected to almost
fully recover by 2023, relative to pre-pandemic projections,
according to the report.
Employment levels are expected to remain well below pre-pandemic
levels during at least the next two years.
Forex:
The dollar slipped further in Asia, with the yen strengthening,
as investors turned nervous after Fed officials' comments on the
U.S. central bank's focus to fight inflation aggressively, said
MUFG Bank.
Outgoing Fed second-in-command Richard Clarida is taking one
last shot to weigh in on the economic outlook, at least in his
official capacity.
In a paper that touts the ongoing value of the new Fed policy
making framework in an economy with high inflation, he wrote: "I
continue to believe that the underlying rate of inflation in the
U.S. economy is hovering close to our 2% longer-run objective and,
thus, that the unwelcome surge in inflation in 2021, once these
relative price adjustments are complete and bottlenecks have
unclogged, will in the end prove to be largely transitory under
appropriate monetary policy."
The euro is likely to fall against the dollar this year as the
Fed is set to raise interest rates ahead of the European Central
Bank against the backdrop of U.S. economic growth and inflation
outpacing that of the eurozone, Bank of America said. It has
forecast EUR/USD to fall to 1.10 by year-end.
"We expect the ECB to be on hold this year and next, compared
with market pricing 19bp [basis points] and 31bp hikes,
respectively in 2022 and 2023," BofA analysts said. They expect the
Fed to raise rates four times this year and four more times in
2023.
Sterling seems relatively unfazed by rising U.K. political
uncertainty but the currency looks vulnerable to a string of bad
news in coming weeks, TD Securities said.
The pound's lack of reaction to troubles facing Prime Minister
Boris Johnson shouldn't come as a major surprise given politics is
unlikely to affect expectations for higher U.K. interest rates, TD
analysts said. Despite sterling's "perky price action," TD's MRSI
framework allocates a "deep short" position to the currency,
expecting it to fall, based on factors such as economic growth,
inflation, risk, positioning, rates, and terms of trade.
Sterling is also the most overbought G10 currency. "That makes
GBP vulnerable to a shift in both the broad USD narrative and the
local risks in the weeks ahead."
Bonds:
Treasury yield rose slightly after they fell Thursday, with
yields on 10- and 30-year notes hitting their lowest levels in more
than a week, following a $22 billion bond auction and scant 0.2%
rise in wholesale prices.
BMO Capital Markets strategist Ben Jeffery said the bond sale
produced a "decent outcome."
AXS Investments chief executive Greg Bassuk said even though
U.S. PPI rose by less than expected, "we believe investors have
reason to remain hyper-focused on factors likely to keep inflation
elevated in the months ahead."
Jefferies is neutral on Italian government bonds heading into
Italy's presidential elections later this month, but would consider
any widening in bond spreads due to political uncertainty as a
buying opportunity.
This is because Jefferies considers there is a low probability
of snap elections. It expects Italian government bond spreads to
remain supported until the third week of January, "given positive
seasonality and the fact that [Prime Minister Mario] Draghi is not
likely to resign much before the Presidential elections due on
24th," Mohit Kumar, managing director for interest rate strategy
said.
Jefferies would be more cautious in the second quarter, when the
ECB's PEPP ends.
Energy:
Oil prices extended their losses in Asia as political pressure
has been growing for the White House to lobby OPEC+ to ensure the
group can hit its production targets amid supply disruptions, OANDA
said.
The short-term outlook for travel demand is also likely to be
crimped by the spread of Omicron, OANDA added, citing Delta CEO Ed
Bastian who said he expects the rebound in travel to be delayed by
60 days.
Oil futures ended lower Thursday, with a significant rise in
U.S. gasoline stockpiles last week raising concern over omicron's
impact on demand for fuel, even as domestic crude supplies stand at
their lowest since 2018.
Prices fell despite continued weakness in the dollar, "signaling
that the move higher in oil futures over the past month may have
once again gotten too far ahead of the physical market reality,"
said Troy Vincent, senior market analyst at DTN.
Several constraints will likely limit renewable sources to a
roughly 20% to 40% share of the total power supply in most markets
over the next decades, according to SailingStone, an
investment-advisory firm that focuses on natural resources.
Those constraints include the volatility of solar and wind
sources and their inability to stabilize power grids, as well as
the cost of renewable-energy projects and the significant amount of
land they use, SailingStone said.
However, the firm said it's still possible to decarbonize the
global economy through a mix of renewables, energy storage,
zero-carbon conventional power, natural gas and carbon-removal
projects.
Metals:
Gold futures rebounded in Asia, helped by sustained weakness in
the dollar as high inflation provokes investor concern about more
hawkish action from the Fed, ANZ said.
Gold futures posted their first loss in five sessions Thursday,
after a rise in the U.S. producer price index reading for December
came in below market expectations.
"It could be argued that the bullish case for gold is its
reputation as an inflation hedge, especially given central banks'
recent record for recognizing how severe the situation is," said
Craig Erlam, senior market analyst at OANDA. "But with inflation
likely nearing its peak, that may not last."
"That said, fear around Fed tightening may also be peaking which
could support gold in the short-term and a break through $1,833
could signal further upside to come," said Erlam.
Aluminum prices were also slightly higher, as "falling
inventories and renewed supplies issues remain supportive across
metals," ANZ said, noting that robust Asian demand for aluminum has
pushed stock levels to a 16-year low. Demand for base metals is
also likely to be helped by a recovery in auto demand.
Electric vehicle companies are facing much higher costs for the
lithium metal used in the batteries that give the cars power,
Rystad Energy said.
"Battery-grade lithium are poised to skyrocket. Prices for the
metal are already trading at a record high of $35 per kilogram in
Asia, and are likely to keep climbing to $50 per kilogram in the
second half of 2022."
Rystad said interest in lithium iron phosphate batteries has
taken off since early 2021, and it expects the supply of lithium
salts "to remain tight through the first half of 2022 at least, due
to lagging production in China and South America."
TODAY'S TOP HEADLINES
Fed's Brainard Says Reducing Inflation Is Top Priority
Federal Reserve governor Lael Brainard, the White House nominee
to serve as the central bank's No. 2 official, told Congress that
efforts to reduce inflation are the central bank's "most important
task."
Ms. Brainard, who joined the Fed in 2014, was a forceful
advocate last year for ensuring that the central bank didn't
prematurely curtail stimulus as part of a focus on spurring a
robust labor-market recovery.
Fed's Christopher Waller Says High Inflation Caught Central Bank
Off Guard
A Federal Reserve official warned that the central bank would
have to move interest rates up more aggressively this year if
inflation stays high through the first half of the year.
Fed governor Christopher Waller said he still thought it was
reasonable to pencil in three rate increases this year, but that
the rate path would ultimately depend on "what inflation looks like
in the second half of the year. If it continues to be high, the
case will be made for four, maybe five hikes," he said in an
interview on Bloomberg TV. "But if inflation falls back in the
second half of the year, as many of us think it will...then you
could actually pause and not even go the full three."
Fed's Evans: Time to Move Toward Tighter Monetary Policy
Federal Reserve Bank of Chicago President Charles Evans said
Thursday monetary policy isn't positioned to deal with surging
inflation and that he supports the central bank's recent shift
toward expecting to raise interest rates.
Mr. Evans didn't say when he would like the Fed to raise rates
from their near zero settings, but he noted that at December's
Federal Open Market Committee meeting his outlook for monetary
policy was in line with the three rate increases this year that Fed
officials collectively penciled in at that time.
Biden Will Nominate Sarah Bloom Raskin as Top Fed Banking
Regulator
President Biden will nominate Sarah Bloom Raskin, a former top
Treasury Department official, to serve as the Federal Reserve's top
banking regulator, the White House said.
If confirmed by the Senate, Ms. Raskin, a former Fed governor,
would become the central bank's vice chairwoman of supervision, the
government's most influential overseer of the American banking
system.
China's Trade Surplus Hit a Record in 2021 as Exports Rose
BEIJING-China's trade surplus hit a record high in 2021, boosted
by strong exports that have topped market expectations since their
pandemic recovery.
For the full year, China's exports rose 29.9% to a new high of
$3.36 trillion, beating 2020's record of $2.6 trillion, according
to data released by the General Administration of Customs on
Friday.
Bank of Korea Raises Rate Back to Pre-Pandemic Level
South Korea's central bank has brought its base rate back to a
pre-pandemic level, raising it for a third time in less than half a
year to fight inflation.
The Bank of Korea increased its benchmark seven-day repurchase
rate by 25 basis points to 1.25% on Friday. The bank had raised the
rate in August and November.
Producer-Price Increases Slowed From Record Pace in December
Prices that suppliers are charging businesses and other
customers closed out 2021 near the highest level in over a decade,
though December showed a slight cooling of producer inflation.
The Labor Department said Thursday that its producer-price index
rose 0.2% in December from November, the slowest pace since
November 2020 and down sharply from a revised 1.0% the prior
month-a possible sign of easing inflationary pressures in the U.S.
supply chain.
Omicron Appears to Have Peaked in U.K., Offering Hope the Wave
Is Receding
LONDON-The U.K. appears to have passed the peak of the latest
wave of Covid-19 caused by Omicron, a promising sign that the
highly transmissible variant's impact may be brief, if intense, and
fueling optimism that the pandemic may be waning.
Scientists say British data offer encouraging signs for
countries behind the U.K. in the Omicron wave-such as the U.S.-that
the variant is echoing the pattern it followed in South Africa,
where cases rose rapidly over the course of just over a month,
before falling back. The wave of Omicron infections in the U.S. is
expected to peak over the weeks ahead, Centers for Disease Control
and Prevention Director Rochelle Walensky said.
Hydrogen Brings New Hope to an Old Industry Titan
Spinning trendy green assets out of venerable industrial
companies at high valuations is a strategy that often sounds better
in theory than in practice. But Thyssenkrupp's promising hydrogen
business could be an exception.
On Thursday, the German company best known for steel production
gave investors a closer look at a 66%-owned joint venture long
buried within its conglomerate structure: Uhde Chlorine Engineers,
now rebranded as Thyssenkrupp Nucera. The unit has long been making
chlorine electrolyzers, which generate hydrogen as a byproduct. A
product redesign means its existing facilities can now crank out
one gigawatt annually of green-hydrogen electrolyzers at
competitive costs to be installed and serviced by its existing
network.
Write to paul.larkins@dowjones.com
Expected Major Events for Friday
05:30/NED: Nov International trade
06:00/FIN: Dec CPI
06:00/FIN: Nov Retail sales
07:00/ROM: Dec CPI
07:00/UK: Nov UK trade
07:00/UK: Nov Index of production
07:00/UK: Nov Index of services
07:00/UK: Nov Monthly GDP estimates
07:45/FRA: Dec CPI
08:00/HUN: Dec CPI
08:00/SVK: Dec CPI
08:00/SVK: Dec Core & net inflation development
08:00/HUN: Nov Construction
08:00/SPN: Dec CPI
08:30/SWE: Dec CPI
09:00/GER: Annual Annual GDP - first provisional calculation
09:00/POL: Dec CPI
10:00/EU: Nov Foreign trade
11:00/IRL: Dec Irish Live Register latest monthly figures
12:30/UK: Dec NIESR Monthly GDP Tracker
15:59/UKR: Nov Trade
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(END) Dow Jones Newswires
January 14, 2022 00:53 ET (05:53 GMT)
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