MARKET WRAPS
Stocks:
European stock markets edged lower as investors sit on the sidelines awaiting economic data later in the week.
Investors are grappling with the new reality of tighter monetary policy ahead.
Last week, minutes from the Federal Reserve's policy group-the Federal Open Market Committee -showed the central bank heading for earlier, faster interest-rate increases and eventual quantitative tightening. Friday's jobs report underscored expectations that the Fed will hike rates in March as it faces higher inflation.
"All told, more than three hikes are priced into markets during 2022 but you would have to say that unless financial conditions notably tighten then all seven meetings [of the FOMC] from March to the end of 2022 are now potentially in play," said Jim Reid, a strategist at Deutsche Bank.
"The highlight of the week ahead will clearly be U.S. [consumer-price index data] on Wednesday," Reid added. CPI is a key measure of inflation.
Shares on the move: Shares in Atos sank 17% after the French information-technology firm said 2021 results lagged expectations due to project delays and supply-chain challenges. Track what the analysts are saying here [https://newsplus.wsj.com/search/realtime/topic/?searchParts=[{%22t%22:%22djn_company%22,%22q%22:%22djn:djnabout:ATO.FR%22,%22c%22:%22ATO.FR%22,%22n%22:%22Atos%20SE%22}, {%22t%22:%22operator%22,%22q%22:%22and%22,%22n%22:%22and%22}, {%22t%22:%22djn_code%22,%22q%22:%22djn:N/ALMT%22,%22c%22:%22N/ALMT%22,%22n%22:%22All%20Market%20Talk%22}]&searchFilterState=open&includeDefaultFilter=true].
BMW surged 2.8% in Frankfurt after shares in the auto maker were upgraded to Buy at Goldman Sachs.
Data in focus: The eurozone and U.K. economies are expected to grow robustly in 2022, by 4.4% and 4.7%, respectively, according to economists at Goldman Sachs.
Although the surge in Covid-19 infections due to the Omicron variant of the coronavirus is likely to weigh on services activity over the winter, the hit will be more manageable than last year, they said.
"Given greater immunity levels, lower intrinsic virus severity and a lower sensitivity of activity to Covid-19 restrictions compared with previous waves, we look for subdued but still positive 1Q growth in the eurozone and the U.K.," Goldman Sachs said.
Once the virus ebbs, the bank expects strong consumption growth as pent-up demand for services is released, with savings rates normalizing while fiscal support remains in place.
The unemployment rate in the eurozone dipped to 7.2% in November, falling below its pre-virus level, Pantheon Macroeconomics's chief eurozone economist Claus Vistesen said. Pantheon forecasts that it will decline further in the next 6 to 12 months.
"Granted, the distortions from furlough schemes and shifts in labor force participation remain wildcards, but at this point we see clear enough evidence in the raw numbers to suggest that the improvement is real," Vistesen said.
With evidence that labor force participation has rebounded in line with higher economic activity, economists at Pantheon are confident that this trend is driven by higher employment. As far as the Omicron variant of the coronavirus is concerned, Vistesen said "it will be a speed bump, at worst.
Norwegian core inflation jumped to 1.8% in December following a reading of 1.3% in November, well above the 1.4% consensus forecast and 1.3% seen by Norges Bank, Handelsbanken said.
The increase in December was broad based, with prices for both imported and domestically produced goods and services rising further, it said.
"All else equal, this increases the likelihood for Norges Bank to move on with faster rate hikes." So far, Norges Bank has signaled three rate hikes this year, which is also Handelsbanken's forecast, but the case is building for a steeper path with four rate hikes this year, it added.
U.S. Markets:
Futures pointed to muted moves for stocks, while government bonds extended losses, as investors awaited inflation data and the start of earnings season.
Rising yields at the start of 2022 have sent a shudder through tech stocks. Pushing yields up are indications that the Federal Reserve could raise short-term interest rates in March and begin to shrink its holdings of bonds and other assets soon afterward.
Inflation data due Wednesday will be keenly watched as investors seek to predict when the Fed will begin to raise borrowing costs. Monthly consumer prices are expected to have risen more than 7% from a year earlier, for the first time since 1982.
Later this week, fourth-quarter earnings season kicks off at major U.S. financial firms, with JPMorgan Chase, Citigroup, Wells Fargo and BlackRock due to file results. Many investors are pushing money into bank stocks, figuring they stand to profit from a rise in interest rates.
Among them is Hani Redha, a multiasset fund manager at PineBridge Investments. He said the New York-based investment firm has cut its ownership of tech stocks and Treasurys while boosting cash holdings and exposure to financial companies.
"Equities are down and bonds are down too," Mr. Redha said. "At least for a while, even cash is better than owning risk assets."
Forex:
The dollar recovered following declines Friday when December's U.S. nonfarm payrolls data showed lower-than-expected jobs growth. The Federal Reserve is unlikely to be concerned by softer employment growth as the underlying trend remains favorable, with further improvement in the labor market expected, MUFG Bank currency analyst Lee Hardman said.
The unemployment rate fell 0.3 percentage points to 3.9% in December, just above the pre-coronavirus low of 3.5% and broadly in line with the Fed's estimates for full employment, he said.
"A further decline in the unemployment rate in the coming months should result in the labor market meeting the Fed's conditions to begin raising rates as soon as at the March FOMC meeting."
The Russian ruble rose as talks between U.S. and Russia about the build-up of Russian troops along Ukraine's border get underway.
Expectations of a breakthrough in lowering tensions are unlikely to be high, ING analysts said. For example, it will be difficult for NATO to promise that it will refuse to accept membership applications from Ukraine as demanded by Russia, they said.
"Yet we see the RUB holding its recovery from last week's USD/RUB spike high at 77.30." As Russian exporters return from their New Year holidays, USD/RUB should return to the 73-75 range, backed by a "very hawkish" Russian central bank and three-month RUB implied yields at 8.5%, they said.
Bonds:
The yield on benchmark 10-year Treasury notes-which moves inversely to their price-rose to 1.795% from 1.769% Friday. Friday's closing level was the highest since January 2020, when yields tumbled at the start of the pandemic.
Ten-year U.S. Treasury and German Bund yields are on track for Societe Generale's respective targets of 1.80% and 0% in 1Q, the French bank's rates strategists said.
"In the coming months, the focus will remain on the next Fed policy steps, so rates market volatility should be driven by U.S. Treasuries," they added.
In the eurozone, near-term inflation prints will likely be high and volatile, maintaining pressure on the European Central Bank to continue preparing policy normalization, Societe Generale said.
"After a volatile 1H, the evolution of the inflation outlook in 2H22 will be a key determining factor for medium-term expectations of ECB policy."
Wider Italian BTP spreads represent the path of least resistance, said Societe Generale's rates strategists, who see caution justified until there is clarity about Italy's presidential elections.
While Societe Generale expects a market-friendly outcome, with Prime Minister Mario Draghi's plans continuing in 2022, it said "investors should stay on the sidelines until this is confirmed."
The continuity of the plans could be maintained with Draghi carrying on as prime minister or elected as president, supervising a caretaker government, Societe Generale said. The prospect of new elections will result in caution from investors.
"The risk of early elections, coupled with hefty supply in 1Q and the end of [the European Central Bank's Pandemic Emergency Purchase Programme] in 2Q, will add to risk aversion," Societe Generale said. The 10-year BTP-Bund spread trades at 137 basis points, according to Tradeweb.
With the narrative of inflation protection likely to dominate in early 2022, it makes sense for issuers to bring new benchmarks and continue to supply the market at levels comparable to 2021, said Societe Generale's rates strategists, anticipating a new 30-year French OATei to be the next new linker to come in the eurozone.
"Issuers should try to bring new lines in 1H as much as possible, as inflation prints should be much lower in 2H22, risking a change in the inflation demand," Societe Generale said.
A new 30-year OATei, a bond indexed to eurozone inflation, is "very much a possibility in the current month," they say, expecting around EUR4 billion to be issued.
Commodities:
Oil prices were flat as fresh supply from Kazakhstan and Libya comes back online. Libyan oil production increased by 200,000 barrels a day to 900,000 barrels, after a major pipeline was restored, according to the nation's energy minister.
Meanwhile in Kazakhstan, after major protests disrupted production last week, production was gradually returning to normal levels, the operator of the country's largest oil field said.
U.S. natural-gas prices rose 4.2% to $3.88 per million British thermal units. Cold weather in the Midwest and eastern U.S. early this week will likely boost demand for the fuel, according to analysts at NatGas Weather.
Gold prices are likely to decline this year as bond yields and the dollar rise, though concerns about inflation and Covid-19 variants will slow losses, UBS said.
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01-10-22 0625ET
