Summary: US equity markets snapped back higher yesterday after having toyed below pivotal levels in the case of the S&P 500. Investors are likely hoping for a benign US January CPI print today that will keep rising US Treasury yields from spoiling the outlook for equities on hopes that peak Fed tightening has already been priced, with about two and a half 25-bp hikes priced for the next four Fed meetings.
S&P 500 futures rallied 1.2% yesterday ahead of today’s US January CPI report on no new news suggesting technical positioning, but also a dangerous risk-reward setup should inflation remain stronger than estimated. It could also be the market’s bet that the new CPI methodology will push the CPI figure below estimates adding to the ongoing rally. Switzerland’s January CPI report yesterday showed 0.6% m/m vs est. 0.5% m/m pushing the y/y inflation rate to 3.3% up from 2.8% in December.
In a choppy but uneventful morning session, Hang Seng Index bounced modestly to up 0.3%. Hong Kong developers recovered from yesterday’s sell-off and bounced 2%-3%. New World Development (00017:xhkg) gained 3%. Healthcare names were laggards, with Wuxi Biologics (02269:xhkg) down 4% and Alibaba Health Information (00241:xhkg) slipping 2%. In A-shares, CSI300 edged down 0.3%, with Auto, educational services, agribusiness, machinery, and ChatGPT names dragging. Non-ferrous metal stocks outperformed, with North Copper (000737:xsec) up 10%, Yunnan Copper (000878:xsec) up 5.7%, and CMOC (603993:xssc) up 4.4%, leading the charge higher. Household appliances names were among the winners with Zhejiang Meida (002677:xsec) advancing by 10%.
Dollar gains cooled off slightly as traders positioned for the US January CPI release due today, and risk assets rallied with gains in US yields cooling off after the recent run higher. Michelle Bowman added to the Fed chorus insisting on more rate increases to rein in inflation. But the Japanese yen was still pressured lower in the US session as USDJPY took a look above 132.50 before sliding to sub-132 levels in the Asian session as Kazua Ueda was officially nominated to head the BOJ on Kuroda’s exit in early April. Upbeat risk sentiment lifted NZDUSD to 0.6360 from sub-0.63 levels earlier in the day, but gains were reversed overnight as NZ 2Yr inflation expectations eased to 3.3% in Q1 from 3.62% in Q4. AUDUSD drifted towards the key 0.70 level but calls for RBA governor Lowe’s resignation (more below) may keep the gains in check. GBPUSD back higher to 1.2150 and labor market data is on tap today. EURUSD back above 1.0720.
Crude oil prices were lower again as fears around impact of Russia’s supply cuts eased and US announced a further release from its reserves. The importance of Russia’s energy supplies has gone down over the last year as Europe has diversified its energy sources and Russia’s oil and gas has continued to flow around the world at discounts of well over 30%. This helped ease fears of a supply shock, also helped by US planning to sell 26mn barrels of oil from its strategic reserves. WTI prices dropped from over $80/barrel to ~$79 while Brent was below $86. The UAE said markets remain balanced and OPEC+ producers don't need to intervene. Elsewhere, the US shale industry remains reluctant to ramp up drilling activity despite strong cash flows.
Gold’s rally from early last year has been derailed by resurgent global sovereign bond yields, as the correction from above 1,950 earlier this month to yesterday’s low of 1,850 reached over 100 dollars per ounce. Precious metals traders will eye the US January CPI print closely today, with a softer print likely leading to higher prices for gold if US treasury yields ease.
In a quiet and choppy session, yields on the 2-year finished unchanged while yields on the 10-year were 3bps richer. The terminal Fed Fund rate, as being priced in by the market, edged up to 5.23%. Fed Governor Michelle Bowman said the Fed is “still far from achieving price stability” and she expects that “it will be necessary to further tighten monetary policy”. On the data front, the median expected growth in household income in the New York Fed’s January Survey of Consumer Expectations fell to 3.3% from 4.6%, the first deceleration since September last year and the largest one-month decline in the nearly 10-year history of the data series. Nonetheless, the 3.3% print is only slightly below the series’ 12-month average of 3.5%. Traders are cautiously waiting for the much-anticipated CPI report today.
The UK saw a strong surge in Monthly Payrolled Employees of +102k, well north of the +15k expected, while the January Jobless Claims dropped –12.9k and the December claims were revised down to –3.2k vs. +19.7k originally reported. The December employment change registered a gain of 74k vs. 43k expected and the Unemployment rate in December was steady at 3.7%. Weekly earnings ex Bonus were +6.7% YoY in December Vs. 6.5% expected and 6.5% in November.
US Fed Vice Chair Lael Brainard has been tapped by Joe Biden to replace Brian Deese as Director of the White House’s National Economic Council and moved Jared Bernstein to replace Cecilia Rouse as the Chair of the Council of Economic Advisers. These are seen as moves to bolster his policy team ahead of a likely re-election run for president in 2024. Brainard is widely considered one of the more dovish-leaning Fed members and there will be considerable interesting in who will fill her empty role as Vice Chair at the Fed.
SolarEdge reported Q4 revenue of $891mn vs est. $879mn and adjusted EPS $2.86 vs est. $1.56 and Q1 revenue outlook of $915-945mn vs est. $914mn as demand for solar module inverters and monitoring software remains strong and especially in Europe. SolarEdge shares were down 5-6% in extended trading. Palantir Q4 revenue of $509mn vs est. $505mn and adjusted EBITDA $122mn vs est. $86mn, but the Q1 revenue outlook of $503-507mn was lower than estimated $522mn, but the market had clearly feared something far worse as Palantir shares rose 17% in extended trading.
RBA’s chief Philip Lowe met with bankers shortly after the surprisingly hawkish RBA decision on February 7 and is suffering political heat on the move for his communication style as he has not spoken in public since mid-December as the RBA rarely speaks after its monthly rate announcements. A deputy governor of the RBA pulled out of a similar meeting planned for tomorrow. Lowe’s seven-year term will run out this September, with his two predecessors having received a three-year extension of their terms. Treasurer Jim Chalmers has said that any decision on Lowe’s future will be considered after a review of the RBA is delivered to his office on March 31.
Tesla was one of the weakest megacap US stocks on Monday, losing 6.1% and suffering its biggest two-day fall since January. Prior to the last couple of days of weakness, Tesla stock had surged of its lows and is still up some 93% from its January nadir. Tesla has maintained its lofty production targets and slashed prices to meet them and get a leg up on competition. Consensus believes Tesla’s 2023 revenue will grow 28% to a new record, with EBITDA expected to swell 20% to a new high, with 12.5% EPS growth. However, from a technical perspective, Tesla’s relative strength index (RSI) is showing the stock rally is slowing, after Tesla traded in overbought territory. The last time Tesla was this overbought was in November 2021.
Plenty of anticipation around today’s January US CPI release after inflation data were adjusted higher for most of the data in October-December and now that the market is sitting close to the highest terminal rate expectations for the Fed this year at near 5.2% (two more policy hikes of 25 bps would take the Fed Funds rate range to 5.00-5.25%) Today's January release will be the first using a new calculation methodology in which weights are adjusted annually rather than every other year and using a new method for calculating new vehicle prices. The month-on-month CPI headline is expected at +0.5% and the ex-Food-and-Energy measure is expected at +0.4%, with YoY figures expected at 6.2%/5.5% vs. 6.5%/5.7% in December. The inflation report will be followed tomorrow by the January US Retail Sales report, expected to show a strong growth in sales after a weak December.
Today’s US earnings focus is Airbnb, Globalfoundries, and NU Holdings with analysts expecting Airbnb to deliver Q4 revenue growth of 22% y/y and EBITDA of $435mn up from $111mn a year ago as the leisure and travel markets around the world continue to recover post the pandemic. Globalfoundries is expected to see its revenue growth slow down to 12% y/y down from 74% y/y a year ago and EBITDA is expected at $803mn highlighting expanding margins as semiconductor manufacturing demand remains robust. NU Holdings, the parent company of Nubank which is the fastest growing digital bank in Latin America, is expected to report net revenue growth of 179% y/y and its second straight quarter of positive net income at $68mn up from $-66mn a year ago.
1000 – Eurozone Q4 GDP estimate
1100 – US Jan. NFIB Small Business Optimism
1330 – US Jan. CPI
1400 – Sweden Riksbank Governor Thedeen to speak
1430 – US Fed’s Barkin (Non-voter) to speak
1600 – US Fed’s Logan (Voter 2023) to speak
1630 – US Fed’s Harker (Voter 2023) to speak
1905 – US Fed’s Williams (Voter) to speak
0015 – Australia RBA Governor Lowe in Senate Hearing
0700 – UK Jan. CPI Quarterly Outlook
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