EMEA Morning Briefing: All Eyes on Powell and Fed Rate Clues

EMEA Morning Briefing: All Eyes on Powell and Fed Rate Clues

MARKET WRAPS

Watch For:

EU M3; Germany GfK Survey; France Consumer Confidence; Italy Consumer/Business Confidence Surveys; no major corporate updates expected

Opening Call:

The recent rally in U.S. stocks should support modest gains in Europe on Friday, with investors ready to scrutinize Powell’s Jackson Hole speech. In Asia, tech stocks lifted the major benchmarks; the dollar, Treasury yields and oil made modest gains; but gold dipped.

Equities:

European equities should post modest gains at Friday’s open after Wall Street rallied, with the Dow and S&P 500 booking their best day in two weeks.

Europe’s advance may be tentative, however, as investors wait to hear from Jerome Powell at Jackson Hole.

Investors will dissect Powell’s comments for clues about the direction of Fed policy, a factor that’s weighed heavily on markets of late.

“I don’t like the idea of Powell being ‘hawkish’ hawkish. I’d like to say he’s gonna be ‘gentle’ hawkish,” TheoTrade said.

“What he’s gonna try to telegraph is this: how many rate hikes do we need to see before we finally reach that pause level, or that pivot level–not a pivot towards cutting rates, but a pivot towards ‘we don’t need to raise rates anymore’.”

Forex:

The dollar edged higher in Asia but may range-trade ahead of Powell’s speech.

MUFG Bank said the symposium and U.S. economic data remain the focus for investors.

Bank of America said U.S. inflation appears to have peaked, helped by lower oil and gasoline prices, and thinks the dollar has also peaked.

“The Fed is not the most hawkish G10 central bank anymore,” with other central banks also making big hikes, it said.

BoA said the dollar is overvalued but it doesn’t expect the currency to weaken in the short term, with inflation to be sticky on the way down, “keeping the Fed on its toes and policy rates high for longer.”

Bonds:

Treasury yields were firmer in Asia after they tumbled on Thursday, widening the inverted gap, a sign that investors expect the Fed to remain tough on inflation in the short term but will have to retreat quickly as higher interest rates push the economy into recession.

The 10-year to 2-year spread narrowed to minus 36 basis points after St. Louis Fed President James Bullard made the case for front-loading rate hikes this year, and said financial markets are underestimating the persistency of inflation.

Read more here.

Earlier in the day, Kansas City Fed President Esther George told CNBC that it remained unclear if July’s downward surprise in U.S. inflation is the start of a trend. She also said inflation remains broad-based and there is “more work to be done.”

Read: Fed Officials Ready to Raise Rates Again, but Unclear on How Much

Energy:

Oil futures moved higher in Asia, but Brent remained below $100 a barrel following Thursday’s losses, as traders continued to weigh the prospects for an Iran nuclear deal and OPEC output cuts.

Markets in general “remain in a holding pattern” ahead of Jerome Powell’s speech on Friday, SIA Wealth Management said. That “could indirectly impact commodities depending on how the dollar reacts to what he has to say.”

Metals:

Gold edged lower, weighed by gains for the dollar and Treasury yields.

Bullion will likely consolidate in the $1,750-$1,780 zone ahead of Powell’s speech, OANDA said.

Copper futures made modest gains on optimism toward China’s economic stimulus package.

ANZ said the package includes CNY300 billion for infrastructure projects, which should support the consumption of industrial metals. Much of this might be directed into the country’s power grid to help ease its energy crisis.

ANZ added that efforts to connect renewable energy projects in China’s far west with its big energy-consuming cities in the east is boosting investment in ultra-high-voltage power lines.

Chinese iron-ore futures extended a recent uptrend, buoyed by Beijing’s growth measures.

Soochow Futures said iron-ore prices have largely recovered from last week’s losses, but data is showing that steel demand hasn’t improved and production has fallen. Soochow thinks there’s limited scope for iron-ore demand to improve.

   
 
 

TODAY’S TOP HEADLINES

Fed Officials Ready to Raise Rates Again, but Unclear on How Much

Two Federal Reserve officials said in television interviews Thursday that while high inflation calls for tighter monetary policy, they are not ready to commit to the size of the rate increase they believe is needed at next month’s policy meeting.

In separate interviews on CNBC, the leaders of the Kansas City and Philadelphia Fed both agreed inflation is at unacceptable levels and requires continued Fed action to bring price pressures back down toward the central bank’s 2% target. But with more data coming before the Federal Open Market Committee meeting scheduled for Sept. 20-21, it is too soon to make a call on whether the Fed will need to raise its 2.25% to 2.5% target rate range by half a percentage point, or by 0.75 percentage point.

   
 
 

China’s New Economic Efforts Fall Short, Economists Say

HONG KONG-Economists said the $146 billion in stimulus measures that Chinese policy makers unveiled this week to prop up the battered economy are unlikely to significantly alter the country’s growth trajectory.

After unexpectedly lowering two key interest rates in mid-August, Beijing stepped up efforts to shore up growth as the country continues its stringent Covid-19 strategy while it also faces a deep property slump and the most severe drought in decades.

   
 
 

Treasury Yields Rise on Bet That Recovery Will Last Longer

U.S. government-bond yields have staged a major rebound this month, reflecting increased optimism among investors about the near-term economic outlook.

Yields, which rise when bond prices fall, remain below their peaks set in June, when investors were most concerned about runaway inflation. But they are also now well above their recent lows, when analysts were hotly debating whether the U.S. was already in, or entering, a recession.

   
 
 

France Considers Taxing Private Jet Use in Fight Against Climate Change

PARIS-France is exploring ways to rein in private-jet flights amid a growing backlash over the wealthy’s use of high-emitting planes to travel the distance of a car or train journey.

Clement Beaune, France’s transport minister, said President Emmanuel Macron had given him the green light to come up with a plan for further regulating and possibly taxing the use of private jets as the French government ramps up its push to fight climate change.

   
 
 

Cloud Companies’ Outlook Cools as Customers Tighten Spending

Cloud businesses are reporting slowing sales growth, as economic worries weigh on the once-booming sector.

After years of rising pandemic-fueled demand, some cloud companies cut their revenue-growth outlook in quarterly results this week, citing pressure on customers to rein in spending and wider concerns of a slowing economy.

   
 
 

Write to paul.larkins@dowjones.com

   
 
 

Expected Major Events for Friday

06:00/SWE: Jul Labour Force Survey

06:00/SWE: Jul PPI

06:00/DEN: Jul Retail Sales Index

06:00/GER: Sep GfK consumer climate survey

06:00/NOR: Jul Retail Sales

06:45/FRA: Aug Consumer confidence survey

07:00/SVK: Jul PPI

08:00/EU: Jul Monetary developments in the euro area (M3)

08:00/ITA: Aug Consumer Confidence Survey

08:00/ITA: Aug Business Confidence Survey

09:00/CRO: 2Q Flash Estimate GDP

09:00/CRO: 2Q GDP

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

 

(END) Dow Jones Newswires

August 26, 2022 00:57 ET (04:57 GMT)

Copyright (c) 2022 Dow Jones & Company, Inc.

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