US futures dipped after Tuesday’s furious last hour reversal rally sparked by Powell's "disinflation" commentary which refrained from pushing back against investor optimism, even as stocks in Europe and Asia were still buoyant, with the FTSE 100 posting a new record high. S&P 500 eminis slipped 0.4% at 7:45 a.m. while Nasdaq futures were 0.2% lower. The underlying benchmarks jumped 1.3% and 2.1%, respectively, in the latest session as investors brushed off Fed chief Jerome Powell’s comments that borrowing costs may need to peak higher than previously expected, choosing to focus instead on his outlook that 2023 will be a year of significant declines in inflation. The dollar slid, Treasuries reversed some of Tuesday’s losses, and an index of commodities rose a second day.
In premarket trading, Chipotle dropped after its results missed estimates. Microsoft gained, with its market value poised to breach $2 trillion, as analysts raised price targets after it unveiled plans to use artificial intelligence tools to improve online search and browsing. Fortinet soared after the cybersecurity company gave a better-than-expected revenue forecast for 2023. Meanwhile, VF Corp. edged higher as it delivered some positives in its fiscal third-quarter earnings, though analysts say these are masking some weaker areas and a tough outlook for the Vans and North Face owner. Oak Street Health rose 30% to $33.68 after CVS agreed to acquire the elder-care provider for deal an enterprise value of about $10.6 billion. Alibaba surged premarket on news it too was developing a Chat GPT-like robot and currently conducting internal testing on the AI-tool. Here are some other notable premarket movers:
US stocks extended their 2023 rally as traders turn more optimistic about the path of the economy and expect a Fed pivot soon. The rally has been boosted by the stubborn pessimism of noted sellside strategists such as JPM’s Marko Kolanovic, Goldman’s David J. Kostin and Morgan Stanley's Mike Wilson who have been skeptical of the rally for the last 400 points and are warning of limited upside. At some point they will be right. The outperformance of tech stocks, specifically, is at risk as the Nasdaq 100 Index approaches a bull market and earnings estimates trend lower, with valuations swelling to expensive levels compared with real bond yields.
“I think we need to be careful with how we interpret the market rally we have been seeing,” said Madison Faller, global strategist at JPMorgan Private Bank. “To me it’s not a rally based upon incrementally dovish messaging — I think it’s actually more so that Powell’s message wasn’t incrementally hawkish,” she said in a Bloomberg TV interview. “In the short term, markets are perhaps running a little ahead of themselves in the sense that valuations are starting to look a little stretched.”
During his SOTU speech last night, Joe Biden said he is announcing new standards to require all construction materials used in federal infrastructure projects to be made in America and said the tax system is unfair, while he called for Congress to pass a minimum billionaire tax and proposed to quadruple the tax on corporate stock buybacks. Biden noted he is committed to working with China where it can advance American interests and benefit the world but if China threatens US sovereignty, the US will act to protect the country and also said the US is in the strongest position in decades to compete.
“Another hawkish speech goes unheard,” Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said of Powell’s comments. “Investors focused on the fact that he appeared just as hawkish as he has always been, that he didn’t promise a 50bp hike at next meeting, and that he said that the Fed won’t actively shrink its balance sheet for at least a few years.”
European stocks rose to their highest level since April, tracking Tuesday’s rally on Wall Street as investors welcomed a balanced tone from Fed Chair Powell. The Stoxx 600 rose 0.8% as corporate earnings also provide support after positive updates from Equinor ASA, Akzo Nobel N.V and ABN AMRO Bank N.V. S&P and Nasdaq futures are both down 0.4%. Here are some of the most notable premarket movers:
Asian stocks edged higher as traders parsed comments by Federal Reserve Chair Jerome Powell that were seen as dovish, even after he reiterated that further interest rate hikes are needed to curb rising inflation. The MSCI Asia Pacific Index gained as much as 0.6%, driven by rate-sensitive technology shares. Benchmarks in Taiwan and South Korea advanced, while Japanese, Hong Kong and Chinese shares fluctuated. The Fed chair’s remarks at the Economic Club of Washington offered traders some relief, who were bracing for a more hawkish recalibration of rate expectations. While interest rates in the US will likely continue to rise, “in Asia, China’s recovery and reopening has just happened recently,” Ken Peng, head of Asia Pacific investment strategy at Citi Global Wealth Investments, said in a Bloomberg TV interview. “That momentum is there, it’s fairly strong.” Still, the stellar rally in Chinese shares over the past three months has stalled as traders take profit and await fresh catalysts. Meituan led Chinese technology stocks lower Wednesday after a report that short-form video service Douyin would make forays into the food-delivery business.
Japanese stocks fell, with investors assessing disappointing tech earnings and as the yen continued to strengthen. The Nikkei 225 declined 0.3% to 27,606.46 as of the market close in Tokyo, while the Topix Index was little changed at 1,983.97. Among the 2,163 stocks in the Topix, 1,138 rose, 886 fell and 139 were unchanged. SoftBank Group shares tumbled 5.1% after the company reported further steep losses in the latest quarter and CEO Masayoshi Son skipped the results call. Nintendo shares slid 7.5% after the electronics maker missed quarterly profit estimates and trimmed its full-year outlook as sales of its Switch game console missed targets. “The yen’s appreciation is offsetting the positive impact of higher U.S. stock prices,” said Tomo Kinoshita, global markets strategist at Invesco. “Earnings are also having a strong impact on the market, as the results seem to confirm that inventory and production adjustments are not completed yet.”
In FX, the Bloomberg Dollar Spot Index fell 0.2%, adding to Tuesday’s 0.4% drop, as the greenback weakened against all of its Group- of-10 peers. Scandinavian currencies and the pound were the best performers.
In rates, treasuries are richer across the curve, with gains led by intermediates, steepening the 5s30s spread by 1.5bp on the day and the US 10-year yield down 2bps. US 10-year yields are near middle of day’s range at 3.645% in the early US session, richer by 3bp on the day and outperforming bunds and gilts by 3.5bp and 1bp in the sector Core European markets are underperforming slightly as traders digest the European Central Bank decision Tuesday to introduce a new remuneration ceiling for deposits from May 1. The bund curve bear steepens with 2s10s widening 3.2bps. The US session focus is on the 10-year note auction, following Tuesday’s poor 3-year results. The treasury auction cycle resumes with a $35b 10-year sale at 1 p.m. in New York, and concludes with a $21b 30-year offering on Thursday; they follow a poor 3-year auction on Tuesday, which tailed by 4bp. WI 10-year at 3.625% is 5bp cheaper than January’s stop-out, which traded 0.5bp through the WI level.
Crude futures advance with WTI adding 1.2% to trade near $78.10. Nat gas futures diverge once again while TotalEnergies writes that The tensions on European gas prices seen in 2022 are expected to continue into 2023, as the limited growth in global LNG production is supposed to meet both higher European LNG demand to replace Russian gas received in 2022 and higher Chinese LNG demand. Spot gold rises roughly 0.4% to trade near
Looking to the day ahead now, we’ll hear from several central bank speakers including the Fed’s Williams, Cook, Barr, Bostic, Kashkari and Waller, as well as the ECB’s Knot. Otherwise, data releases include Italian retail sales for December, and earnings releases include Disney and Uber.
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A more detailed look at global markets courtesy of Newsquawk
APAC stocks were indecisive and failed to sustain the momentum from Wall St where markets whipsawed as attention centred on Fed Chair Powell before the major US indices eventually closed at session highs as Powell’s two-sided comments proved not to be as hawkish as some feared. ASX 200 was underpinned by strength in financials and with the mining-related industries benefitting from the rebound in underlying commodity prices. Nikkei 225 underperformed with sentiment in Japan pressured by weak earnings reports from the likes of SoftBank, Sharp and Nintendo. Hang Seng and Shanghai Comp. were indecisive amid lingering tensions from the spy balloon incident and after China denied a US request for a phone call between defence officials.
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European bourses are firmer across the board, Euro Stoxx 50 +0.7%, taking advantage of the firmer Wall St. close and shrugging off indecisive APAC trade. Sectors are similarly bid with Energy outperforming given benchmark activity and post-Equinor, though upside is capped by TotalEnergies. Stateside, futures are in modest negative territory paring some of the post-Powell upside ahead of key speakers incl. Fed's Williams. BIS' Carstens says a re-think is needed on regulating big tech activities in the financial sector. Adding, it is time to consider tangible operations for direct regulation. Tesla (TSLA) China January deliveries 66.05k, +18% MM, via CPCA; adding, China sold 1.3mln passenger vehicles, -37.9% YY.
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DB's Jim Reid concludes the overnight wrap
Morning from Paris where I'm staying at a hotel I last stayed in 3.5 years ago. All I can say is that the room service menu has soared in price since I was last here. As such after a cancelled dinner and a long day of no food I roamed the back streets of the Arc De Triomphe searching for something suitable. I gambled on a bagel shop. I got it back to my room and it was disgusting. The glamour of international business travel. I have a client breakfast, lunch and dinner today so I'm expecting much better!
Yesterday was all about the wait for Powell’s speech at the Economic Club of Washington, and then the interpretation of it. It’s a bit of a generalisation, and my views were scarred by 2 horrible bagels, but I would say the more the FOMC press conference went on last Wednesday the more dovish Powell sounded. However, last night’s speech was a little bit of the reverse. When all was said and done though, relative to pre-Powell levels terminal didn’t move much, rates moved a bit higher and equities saw an impressive climb (+1.29%). There was a fair bit of vol during the speech with the S&P trading in a wide 1.8pp range, while 10yr Treasuries traded in a 6bps range. The key market theme was that equities seemed to breathe a big sigh of relief that he didn't choose this moment to notably change the script post payrolls. There was some fear that he would.
To review his comments, Powell continued to repeat last week's FOMC mantra that further rate hikes were needed in order to rein in inflation and that policy would have to stay tight for some time. While directly addressing last week’s report he said it “shows you why we think this will be a process that takes a significant period of time ... the labour market is extraordinarily strong". He then spent a good deal of time referencing back to his comments from the FOMC press conference. These opening remarks caused the market to initially turn risk on with the S&P up 1.2% and 2yr yields moving -9bps lower after the first 30 minutes of the interview. However, Powell then pointed out that if the labour market remains strong “it may well be the case that we have to do more.” This seemed to signal to markets that a further 50bps of hikes is the floor for fed funds with risks to the upside on labour or inflation data coming out higher than expected. This caused a quick reversal with the S&P 500 dropping nearly -2% and 2yr yields climbing +8bps in the span of a half hour.
However, once Powell had wrapped up, both moves were retraced throughout the rest of the US afternoon with the S&P finishing near the highs of the day, and higher than during the peak of Powell’s interview, at +1.29%. Meanwhile the policy-sensitive 2yr yield sold off with yields finishing flat at 4.46% and 10yr yields +3.4bps higher at 3.67% (although -2.2bps lower this morning in Asia). Even with Powell raising the spectre of a higher terminal rate than the Fed had previously signalled, fed future pricing actually dropped ever so slightly with the July meeting closing at an implied fed funds rate of 5.153%, down 0.05bps. We've actually dipped -2.5bps this morning.
Digging into the market reaction more, it was a very risk-on rally with 70% of the S&P 500 higher on the day, with technology the leader once again. Semiconductors (+3.2%), Media (+3.1%), Energy (+3.1%) and Software (+2.6%) were the best performing sectors, while the only laggards were defensives like Telecoms (-1.2%), Household Goods (-0.7%) and Food & Beverage (-0.5%). The VIX volatility index finished near the lows of the day at 18.6pts.
There was also a larger risk on move in commodities with Brent crude oil up +3.33% to $83.69/bbl and WTI up +4.09% to $77.37/bbl following news that Saudi Aramco is increasing the prices of fuel shipments to Asia starting in March on the back of heightened demand. The move took another leg higher following the general risk-on sentiment following Powell’s remarks. The rise in oil and copper (+1.13%) due to China’s reopening meant that the Bloomberg Commodity index (+1.35%) rose by its largest amount since December 13.
Before Powell, markets had extended the hawkish shift seen since payrolls. First, the other central bankers we heard from continued to lean towards further rate hikes, with Minneapolis Fed President Kashkari saying that “right now I’m still at around 5.4%” on where rates needed to go. That would imply the Fed needs to do another 25bp move on top of current market pricing. Separately, Bundesbank President Nagel said that “more significant rate increases will be needed”, and pushed back on an imminent pause in saying that “I don’t see that our work is done with this rate hike in March.”
On top of those remarks, various pieces of data signalled that the battle against inflation was far from over. For instance, Manheim’s index of US used-vehicle prices was up by +2.5% in January, marking its strongest monthly increase since November 2021. Bear in mind that used cars and trucks make up over 4% of core CPI, and we’ve seen 6 consecutive monthly declines in that component, so any reversal there would help push up the overall numbers. Back in Europe, we also had the ECB’s latest Consumer Expectations Survey for December. That showed 12-month expectations for inflation remaining unchanged at 5.0%, and 3yr expectations moved back up a tenth to 3.0%, so still a full point above their target even at a medium-term horizon. And finally on the growth side, the recent strong data in the US saw the Atlanta Fed’s GDPNow tracker increase its Q1 growth estimate to an annualised +2.1%, up from +0.7% previously. A month ago many had a flat or negative quarter pencilled in for Q1.
Ahead of Powell, the more hawkish newsflow had led European sovereigns to lose ground for a 3rd consecutive day, with yields on 10yr bunds (+5.3bps), OATs (+4.7bps) and BTPs (+7.1bps) all moving higher. Those movements accelerated into the close after we heard that the ECB were adjusting the remuneration on government deposits, which would now have a ceiling of the euro short-term rate (€STR) minus 20bps. Previously, it had been whichever was lower of the deposit rate or the €STR. The aim is to encourage an orderly reduction in these deposits, which they said is “in order to minimise the risk of adverse effects on market functioning and ensure the smooth transmission of monetary policy”. Otherwise, European equities were pretty subdued yesterday, with the DAX (-0.16%) and the CAC 40 (-0.07%) posting small losses, whilst the STOXX 600 (+0.23%) saw a modest advance. This was all pre-Powell.
Asian equity markets are mixed overnight. As I type, the KOSPI (+1.39%) is leading gains with the Hang Seng also trading in positive territory. Meanwhile, the Nikkei (-0.43%) is lagging its peers following disappointing quarterly earnings from Nintendo, Softbank and Sharp Corp. Elsewhere, Chinese stocks are muted with the CSI (+0.01%) and the Shanghai Composite (-0.05%) fluctuating between gains and losses.
Outside of Asia, US stock futures are wavering with contracts tied the S&P 500 (-0.03%) fractionally lower and those on the NASDAQ 100 (+0.06%) just above flat.
President Biden delivered his State of the Union address last night, in which he promised that the US would not hit the debt ceiling and default on its debts. As expected President Biden called for increased taxes on stock buybacks as well as billionaires, while also touting efforts to near-shore American manufacturing that is aligned to critical supply chains. It probably wasn't the most dramatic State of the Union address which might be partly due to US political gridlock.
Finally back to yesterday and it was another quiet day on the data front, but the US trade deficit came in at $67.4bn in December (vs. $68.5bn expected). Elsewhere, German industrial production for December underwhelmed with a -3.1% contraction (vs. -0.8% expected).
To the day ahead now, and we’ll hear from several central bank speakers including the Fed’s Williams, Cook, Barr, Bostic, Kashkari and Waller, as well as the ECB’s Knot. Otherwise, data releases include Italian retail sales for December, and earnings releases include Disney and Uber.