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European markets retreat despite flash PMI data indicating return to growth for euro zone

The Stoxx 600 index was down 0.3% in early afternoon trading, with basic resources stocks falling 1.2% while insurance stocks rose 0.8%.PMIs track business activity in the services and manufacturing sectors, and Tuesday’s figures showed the euro zone returning to modest growth in December. This is a boost for hopes that the 20-member currency bloc may avoid recession.‍

January 24, 2023
6 minutes
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European Markets Were Lower On Tuesday As Investors Digested the Latest Flash Purchasing Managers’ Index Data From the Euro Zone In January. The Data Showed a Slight Slowdown in Growth, Which Was In Line With Expectations. However, Some Investors Were Disappointed With the Data, Which Weighed On the Markets.


The Stoxx 600
index was down 0.3% in early afternoon trading, with basic resources stocks falling 1.2% while insurance stocks rose 0.8%.
PMIs track business activity in the services and manufacturing sectors, and Tuesday’s figures showed the euro zone returning to modest growth in December. This is a boost for hopes that the 20-member currency bloc may avoid recession.


The S&P Global
euro zone composite PMI rose to 50.2 in January, up from 49.3 in December and ahead of expectations. The 50 mark separates expansion from contraction.


In other markets overnight, those in the Asia-Pacific region traded higher as Lunar New Year holidays were observed in most of the area. However, U.S. stock futures were mostly flat on Tuesday morning as investors looked to keep up a strong start to the week during a busy period of corporate earnings. The euro zone's apparent revival in business activity in January contrasted sharply with the U.K.'s Tuesday flash PMI readings, which showed the economy contracting at its sharpest rate in two years.


The S&P Global
composite U.K. PMI slid to 47.8 in January from 49.0 in December, falling short of a 48.5 consensus forecast in a Wall Street Journal poll of economists. This is a disappointing result, as it indicates a contraction in the U.K.'s service and manufacturing sectors. S&P Global said that a combination of factors, including widespread strike action, staff shortages, export losses, the cost of living crisis, and sharp increases in interest rates, all contributed to squeezing economic activity.


According to new flash PMI readings on Tuesday, the euro zone economy returned to modest growth in December. This is good news for the region, which has been struggling economically for some time. The PMI readings suggest that things are slowly improving, and this is likely to continue in the coming months.
The S&P Global euro zone composite PMI rose to 50.2 in January, up from 49.3 in December and ahead of expectations. The index covers both manufacturing and services activity, and the January reading indicates modest growth in the euro zone economy.


The index exceeded the 50 mark, which separates expansion from contraction, for the first time since June. This is the first time the index has been this high since June.
The euro zone's dominant services sector index rose to 50.7 in December, while the manufacturing index improved to 48.8. This surpassed forecasts but manufacturing remains in contractionary territory.


Danish stocks were the biggest movers on Tuesday, with some stocks rising and others falling.
Topdanmark, an insurance company, led the Stoxx 600 after its fourth-quarter earnings report and dividend proposal. Ambu, a hospital equipment maker, fell after SEB cut the stock to "sell" from "hold."


According to Allianz Chief Economic Adviser Mohamed El-Erian, the shift to a 25 basis point hike at the next Federal Reserve policy meeting is a "mistake." El-Erian argues that inflation is not as much of a concern as it once was, and that the Fed should not make any sudden policy changes that could disrupt the economy.
In a recent interview with CNBC, former Federal Reserve Governor Kevin Warsh argued that the Fed should raise interest rates by 50 basis points, rather than the 25 basis points that has been widely anticipated. Warsh believes that this would be a more effective way to combat inflationary pressures and tighten financial conditions.
He said that inflation has shifted from the goods sector to the services sector, but it could very well resurge if energy prices rise as China reopens.


El-Erian believes that inflation will level off at around 4%. This presents the Federal Reserve with a difficult decision: whether to keep the economy suppressed in order to reach the 2% inflation target, or to promise that target for the future and hope that investors can tolerate a steady 3% to 4% inflation rate in the meantime.
He said that the latter is probably the best outcome.


After a period of regulatory crackdowns and a pandemic-induced slump, Chinese tech stocks are back on Wall Street's radar. One stock in particular is a top pick for many investors.


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According to a Wall Street Journal report, Federal Reserve officials are next week are almost certain to approve another deceleration in interest rate hikes. They will also discuss when to stop the increases altogether.


The Federal Open Market Committee, which sets rates, is scheduled to meet on Jan. 31 and Feb. 1. Markets are pricing in a nearly 100% chance of a quarter-point increase in the central bank’s benchmark rate at that meeting. Most prominently, Fed Governor Christopher Waller said Friday that he sees a 0.25 percentage point increase as the preferred move for the upcoming meeting.


However, Waller said he doesn’t think the Fed is done tightening yet. This is backed up by several other central bankers who have made similar statements in recent days.


The Journal report said that slowing the pace of interest rate hikes could provide the opportunity to assess the impact of the increases that have already been made on the economy. A series of rate hikes that began in March 2022 has resulted in increases of 4.25 percentage points.
CME Group data indicates that market pricing is currently indicating quarter-point hikes at the next two meetings, followed by a period of no action, and then up to a half-point reduction by the end of 2023.


However, several officials, including Governor Lael Brainard and New York Fed President John Williams, have indicated that they believe the current monetary policy path is the correct one.


European markets are set to open higher on Tuesday, with investors keeping an eye on flash PMI data for the euro zone in January. A positive reading could provide a boost to the region's economy, while a negative reading could weigh on sentiment.
According to data from IG, the U.K.'s FTSE 100 index is expected to open 10 points higher at 7,801, Germany's DAX 18 points higher at 15,122, France's CAC up 12 points at 7,049, and Italy's FTSE MIB up 81 points at 25,945.

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