Shares in Europe could get a boost from two senior Federal Reserve officials' comments that the central bank was making progress in its inflation fight. Asian stock benchmarks rose; Treasury yields were broadly higher; the dollar gained; while oil and gold also advanced.
European stocks are seen opening higher despite Wall Street's overnight retreat and concerns about the health of the economy after recent economic data and corporate-earnings reports.
Fed Vice Chair Lael Brainard and New York Fed President John Williams said in separate remarks on Thursday that the central bank was making progress in its inflation fight, but it would take time to bring inflation back to the Fed's 2% target.
"What just some weeks ago would have seen markets cheering the weaker data as it would have suggested correctly that the Fed's aggressive rate hike campaign is doing its job in tamping down the demand side of the economy, is now being judged more harshly with bad news no longer enjoying a warm welcome by traders and investors alike," said Quincy Krosby, chief global strategist for LPL Financial.
Over the past few weeks, earnings expectations for the first quarter and the second quarter of 2023 switched from year-over-year growth to year-over-year declines, said John Butters, senior earnings analyst at FactSet.
Expectations for both quarters have been falling over the past few months, he added.
The dollar gained in Asia, but Corpay's Karl Schamotta cautioned that risk appetite remains weaker after a slew of data pointed to a U.S. slowdown,
"A narrowing in expected growth differentials is beginning to push the greenback toward the bottom of the 'dollar smile'," the chief market strategist said.
"The US's combined roles--major economy, global safe haven, and recycling center for international capital--mean that the dollar tends to strengthen both when the US is growing more quickly than its global counterparts, but also, counter-intuitively, when it is growing much more slowly.... When growth rates converge--as they are now--bad economic news in the US becomes bad news for the dollar as money tends to flow out into global markets in pursuit of higher yields."
But he cautioned that "the dollar could smile once again" on the return of "debt ceiling nonsense."
The U.S. dollar has yet to peak, Spartan's Peter Cardillo said, with monetary policy driving FX markets.
"The spread differential between [the US and] Europe and Japan is quite large and remains widening."
He sees the Fed adding 75 basis points to the fed funds target rate over the next two FOMC meetings, tightening faster than its counterparts in the developed world.
"We can probably weather economic decline better than other countries and that means the dollar probably will have one more rise before a natural reversal sets in."
Treasury yields were broadly higher early Friday.
The 10-year Treasury note yield bounced off a four-month low Thursday as a rally for bonds took a breather after data showed the U.S. labor market remains strong.
Fed Vice Chair Lael Brainard indicated she was supportive of slowing the pace of rate rises to a more traditional quarter percentage point at the central bank's next policy meeting.
"We are seeing the shifting gears of tighter monetary policy having the desired effects," New York Fed President John Williams said in a speech to bond market analysts in New York.
But, he added, "we still have a ways to go to get" the Fed's policy rate "to the level that I think is sufficiently restrictive to achieve our goals."
Fed Chair Jerome Powell's "objective of cooling the jobs market has yet to be convincingly accomplished and as such, the Fed remains on track to hike on Feb. 1 and lay the groundwork for a move in March as well," BMO Capital Markets said.
"A May move remains a wild card and it's too soon to take a quarter-point at that junction completely off the table as the fed funds futures market appears content to at the moment," BMO said.
The messaging from the first Fed policy meeting of the year will further refine investor expectations or where the fed-funds rate is likely to peak as well as for the timing of the first cut, BMO added.
Oil prices rose in Asia, extending overnight gains as traders continued to look ahead to the upcoming EU ban on Russian oil products.
"We feel the recent strength in crude oil and, so far, a lack of selling in spot markets," Tariq Zahir, managing member at Tyche Capital Advisors, said.
Prices are likely to move higher from here "with the reopening of China, the continued Ukraine situation, and the fact our government must buy crude oil to refill" the Strategic Petroleum Reserve.
"While China's mobility data are inflecting positively, there is still possibly too much optimism over China's demand profile built up in short-term analysts' expectations," said SPI Asset Management.
The first quarter of this year will be a "fragile period for commodities, with recession angst filling the airwave," it said.
Nevertheless, the "observed sharp increase in crude imports to China and the significant decrease in product exports implies [that mainland China] is preparing for a substantial surge in demand, meaning a massive impact on global oil prices could happen in Q1," it added.
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