US index futures reversed an earlier drop and traded near session highs as traders braced for inflation data that will may support the Fed’s commitment to further policy tightening (or it may not), and as the world was transfixed by a global UFO hullaballoo(n). S&P 500 futures were up 0.3% at 8:00am ET while Nasdaq 100 futures rose 0.6% after the underlying index suffered its first weekly loss of 2023. European stocks rose to trade near session highs, lifted by construction, industrial goods and consumer stocks while energy and real estate underperformed. The dollar pushed higher, Treasuries were little changed and oil slipped after Friday’s jump; bitcoin slumped.

In premarket trading, Sorrento Therapeutics slumped after the drug developer filed for Chapter 11 bankruptcy protection in Texas.  Shares of major US tech and internet companies rose premarket, meanwhile Evercore ISI upgraded Zillow Group to outperform from in line. Here are some other notable premarket movers:

On Sunday, the US downed yet another flying object, the fourth so far - over Michigan yesterday, following those over northern Canada, Alaska and off the South Carolina coast - after deciding to be more cautious. The Pentagon doesn’t yet know what the most recent objects are and isn’t ruling out anything at this point. Meanwhile, China said US balloons have flown over its airspace more than 10 times since 2022.

The January CPI report on Tuesday is expected to show an increase of 0.5% from a month earlier, spurred in part by higher gasoline costs. That would mark the biggest gain in three months. Excluding fuels and foods, so-called core prices — which better reflect underlying inflation — are seen rising 0.4% for a second month. The BLS changed how CPI is calculated. They changed some weightings which had the effect of showing that less progress was made on inflation than previously thought.

Amid the new data, investors will be reassessing how high US interest rates will rise this year, with inflation and jobs data likely to still come in hot later this week. That has fueled bets for the Fed rate to peak at 5.2% in July, up from less than 5% a month ago.

“We are certainly continuing to be very cautious on equities,” Nannette Hechler-Fayd’Herbe, chief investment officer at Credit Suisse International Wealth Management, said on Bloomberg Television. “We find at the moment there is a disconnect in valuations versus where interest rates by the Fed — but also by other central banks — are going to be for the remainder of the year.”

The rally in US equities lost steam last week over concerns that the Fed will stick to its hawkish resolve amid a strong labor market and relatively elevated inflation. Traders will parse this week’s data for clues on the path of monetary policy and the impact it could have on the US economy.

“We’re looking for a correction over the next few months to take us back down to the lower 3,000s area in the S&P 500,” Saed Abukarsh, chief portfolio manager at Ark Capital Management Dubai Ltd., told Bloomberg Television. “The incentive for the Fed to be hawkish is still there. There is no incentive for them to be less hawkish.”

Meanwhile, Morgan Stanley's downbeat in house permabear argued that US stocks are ripe for a selloff after prematurely pricing in a pause in Fed rate hikes. “While the recent move higher in front-end rates is supportive of the notion that the Fed may remain restrictive for longer than appreciated, the equity market is refusing to accept this reality,” Michael Wilson wrote in a note (more shortly). Wilson — the top-ranked strategist in last year’s Institutional Investor survey — expects deteriorating fundamentals, along with Fed hikes that are coming at the same time as an earnings recession, to drive equities to an ultimate low this spring. “Price is about as disconnected from reality as it’s been during this bear market,” the strategists said.

European stocks rose as the EU Commission lifts its growth forecast for the euro-area in 2023 while lowering estimates for inflation. The Stoxx 600 trade higher by 0.6%, rising to session highs, with outperformance seen in the industrial, construction and consumer product sectors. Here are some of the biggest movers on Monday:

Asian stocks fell, heading to their lowest level in about a month, as investors awaited key inflation data from the world’s largest economy.   The MSCI Asia Pacific Index declined as much as 1.2%, extending losses after a two-week rout. Tech stocks led the slump with TSMC and Tokyo Electron dragging the gauge the most. Benchmarks in South Korea, Taiwan and Singapore slid while those in Hong Kong fluctuated.  Asian stocks have declined over the past two weeks as strong US jobs data and hawkish comments by Federal Reserve officials dashed hopes of an interest-rate pivot. Investors are reassessing how high US rates will rise this year, with inflation and jobs data likely to still come in hot later this week. “Part of the reason for the overall decline goes to a lack of economic reports to offset the chorus of central bankers chanting ‘higher for longer,’” said Sam Stovall, chief investment strategist at CFRA, adding that investor nervousness may decrease after the release of US inflation figures due Tuesday.  China’s defense stocks gained after domestic news outlet The Paper reported that the nation is getting ready to take down an unidentified object flying over waters near the port city of Qingdao. Meanwhile, equities in Japan underperformed amid expectations that Kazuo Ueda, who is expected to be nominated as Japan’s central bank governor, will adopt faster policy normalization

Japanese stocks fell as investors turned cautious ahead of US inflation data due Tuesday. Meanwhile, traders are awaiting the outcome of the official BOJ governor nomination, with the market weighing Kazuo Ueda’s potential policy stance.  The Topix Index fell 0.5% to 1,977.67 as of market close Tokyo time, while the Nikkei declined 0.9% to 27,427.32. Sony Group contributed the most to the Topix Index decline, decreasing 1.9%. Out of 2,163 stocks in the index, 702 rose and 1,356 fell, while 105 were unchanged. “Stocks are down partly to reflect the adjustment in US tech stocks last week and the market seems to still be digesting information regarding the potential new BOJ chief,” said Takeru Ogihara, chief strategist at Asset Management One. “Regardless of who the new governor is, BOJ seems to be moving towards monetary policy normalization, which would lead the interest rate and bank stocks to rise.”

Australia's S&P/ASX 200 index fell 0.2% to 7,417.80 as investors assess earnings and brace for a critical US inflation report due this week. Consumer discretionary shares led sector losses, dragged lower by Star Entertainment after the casino operator said its Sydney trading has been hit by operating restrictions and competition from Crown. In New Zealand, the S&P/NZX 50 index fell 0.9% to 12,075.18

India stocks also declined for a second day ahead of the release of consumer-price data later on Monday which came in hotter than expected (6.52% vs exp. 6.50% and up sharply from 5.72% for December). India’s central bank remains watchful of inflation and is open to using monetary policy action to tame price pressures further.  The S&P BSE Sensex fell 0.4% to 60,431.84 in Mumbai, while the NSE Nifty 50 Index declined 0.5%. All but three of BSE Ltd.’s 20 sector gauges traded lower, led by service industry stocks. Infosys contributed the most to the Sensex’s decline, decreasing 2.5%. Out of 30 shares in the Sensex index, 11 rose and 18 fell, while 1 was unchanged.

In FX, the Bloomberg Dollar Spot Index rose as much as 0.3% before reversing gains, with the greenback trading mixed against its Group-of-10 peers. The USD/JPY gained 0.9% to 132.60 as the Japanese yen underperforms its G-10 counterparts. The New Zealand dollar is the best performer, adding 0.4% versus the greenback.

In rates, Treasuries were narrowly mixed with the curve flatter and long-end slightly richer on the day while front-end trades slightly cheaper vs Friday’s close. In Europe, gilts underperform with busy week of issuance lined-up. US 10-year yields little changed on the day at 3.735% with bunds and gilts underperforming by 1bp and 3bp in the sector; long-end outperformance on Treasury curve flattens 2s10s, 5s30s spreads by 1.7bp and 2.5bp on the day. Bund futures are in the green while Gilts are slightly lower. According to Bloomberg, the dollar issuance slate is empty so far (so no rate lock trades); preliminary estimate suggests $25 billion in new issues this week with bulk of the deals expected Monday before Tuesday’s inflation data. US session light for risk events, with price action relatively calm ahead of Tuesday’s inflation data.

In commodities, crude futures reversed an earlier decline with WTI now flat just shy of $80, after sliding down almost 2% lower. Spot gold falls roughly 0.3% to trade near $1,859.

In cryptos, stablecoin issuer Paxos has been directed to stop minting Binance Coin (BUSD) by the US SEC; following on from WSJ reporting over the weekend that US SEC intends to sue stablecoin issuer Paxos, which is behind the Pax Dollar (USDP) and Binance USD (BUSD) tokens, over the latter stablecoin. India’s Finance Minister said the G20 is exploring collectively regulating cryptocurrencies, according to Reuters.

There is no macro on today's calendar; Bowman is the only Fed speaker at 8am ET this morning

Market Snapshot

Top Overnight News

1. The BOJ's expected next governor Kazuo Ueda likely won't rush to overhaul ultra-loose policy and will instead let economic data guide the exit timing, said Tetsuya Inoue, who was Ueda's staff secretary when he was a central bank board member. RTRS
2. The euro-zone economy will fare better this year than previously feared as a mild winter and high levels of gas storage help to ease the energy crisis, and the labor market holds up, according to the European Commission. European Union officials in Brussels raised their forecast for growth this year, predicting a 0.9% expansion in the currency bloc, and said it would narrowly avoid a recession. They also cut their projection for consumer price growth, though it remains high at 5.6%. BBG
3. Wagner Group founder Yevgeny Prigozhin said it could take Russia up to another two years to capture the entirety of the Donetsk and Luhansk regions, and up to three if Moscow decides to take land east of the Dnipro River. WSJ
4. Russia lost 1140 troops on Friday, a new single-day record, bringing the total death toll to nearly 137K (and Russian casualties over the last two weeks are likely the highest of the war). Also, Russia is witnessing an historic exodus of its citizens, with 500K-1M people leaving the country since the Ukraine war began (a departure on par with the 1917 Bolshevik Revolution and the Soviet Union collapse in 1991). Insider / WA Po
5. “No landing” scenario gains traction among economists, raising fears the Fed still has more work to do on rates before inflation is sustainably on a path to the 2% target. WSJ
6. Americans with college degrees saw a 7.4% inflation-adjusted drop in income last year, the steepest fall since 2004 and one that erases nearly all pandemic-era gains. BBG
7. Walmart tells suppliers "no more price hikes" as it begins worrying about the effects of inflation on its customers (Walmart can also see that input costs are falling, which means suppliers have less need for incremental price increases). RTRS
8. Meta has delayed finalizing multiple teams’ budgets while it prepares a fresh round of job cuts (11k employees, 13% of workforce) as Mark Zuckerberg’s plan to contain costs in his “year of efficiency” causes disruption at the social media company. Also, AMZN has cut ~20% of the headcount at its Zappos subsidiary. FT / WSJ
9. Ford is set to announce as soon as Monday it plans to build a $3.5 billion lithium iron phosphate battery plant in Michigan, sources told Reuters. Ford is expected to own and operate the plant with Chinese battery company China's Contemporary Amperex Technology Co Ltd (CATL) (300750.SZ) as a technology partner to help develop the batteries. RTRS
10. Investors have pulled a net $31 billion from U.S. equity mutual funds and exchange-traded funds in the past six weeks, according to Refinitiv Lipper data through Wednesday. That marks the longest streak of weekly net outflows since last summer and the most money pulled in aggregate from domestic equity funds to start a year since 2016. WSJ

A more detailed look at global markets courtesy of Newsquawk

APAC stocks began the week mostly subdued as geopolitical tensions lingered after the US shot down a fourth flying object and with markets bracing for Tuesday's US CPI data, while the region also digested earnings releases and news that Japan's government is likely to nominate academic and former BoJ member Ueda to head the central bank. ASX 200 was lacklustre with earnings in focus and the Consumer Discretionary sector was pressured alongside a more than 20% drop in Star Entertainment shares after it flagged an impairment charge of up to AUD 1.6bln. Nikkei 225 underperformed as participants pondered over the future of the BoJ with the government likely to nominate Ueda as the next central bank chief after dovish continuation candidate and BoJ’s QE policy architect Amamiya was said to turn down the role. Hang Seng and Shanghai Comp. were mixed with Hong Kong pressured early on by weakness in property and tech, while the mainland was kept afloat after China’s recent loans and aggregate financing data topped forecasts with New Yuan Loans at a record high for January.

Top Asian News

European bourses are modestly firmer, Euro Stoxx 50 +0.5%, with fresh developments limited and the schedule relatively sparse ahead of Tuesday's key events. Sectors are predominantly in the green, featuring outperformance in Travel and Construction names while Energy and Real Estate lag on benchmark pricing and broker activity respectively. US futures are incrementally in the green with the NQ leading slightly though overall performance is contained as we look towards Tuesday's CPI with Fed's Bowman due beforehand. Turkey is reportedly considering extending its stock market closure, according to Bloomberg sources.

Top European News

FX

Central Banks

Fixed Income

Commodities

Geopolitics

Crypto

US Event Calendar

Central Bank Speakers

DB's Jim Reid concludes the overnight wrap

I was left alone with Maisie yesterday morning while the twins went to "Ninja Warriors" which is basically a venue aimed at making children as tired as they possibly can be to give their parents a rest later. However my wife came back more tired than the boys as she had to join in! Anyway I used the couple of hours to try to write a surprise Valentine's Day song from Maisie to her mum. However I did it slightly differently. I asked ChatGPT to come up with some song lyrics given a selection of information about the family. The results were fairly spectacular and although I didn't use it all, I used it a starting point and tweaked around it. I'm pretty sure AI will revolutionise the written word in the years ahead. So if you've forgotten a present for your loved one for tomorrow why not ask chatGPT to write a poem for and about them. What could be more romantic than letting a robot and algorithm work out the words to express your love!

On the most romantic day of the year tomorrow, the pheromones in the financial community might be dictated by a pretty important US CPI print. Sadly chatGPT can't give us any guidance there.

It only feels like yesterday that US inflation prints were seen as last year’s news given the recent falls. In addition, forecasts and breakevens suggested we were on a glide path to normality over the next few months and quarters.

However that view has received a bit of a jolt in the last 10 days. First we had payrolls print which raised the prospect that core services ex-shelter could stay stronger for longer. Then we had lots of hawkish central bank speak that the market had previously ignored but was now slowly waking up to. Then Manheim suggested US used cars (+2.5% mom in January) climbed at their fastest rate for 14-months and finally we had US CPI revisions on Friday that have rewritten the last year of history and in turn reduced core inflation by around a tenth each month leading up to June and have increased it by an average of around a tenth in each month since August. As such the trend in core CPI hasn’t fallen as much as expected and we now haven’t seen any month less than +0.3% MoM. In addition 3m annualised core CPI ran at 4.3% in December rather than the 3.1% reported at the January 12th release. So although year on year hasn’t changed the momentum is notably different.

This feeds into work done by our economists over the last few weeks suggesting that inflation is going to be edging up again before it falls. See their chart book “The rise before the fall” (link here) for more on this.

For tomorrow’s reading, higher gas prices should boost headline MoM CPI (+0.42% DB forecast, consensus +0.5%). Last month this printed at -0.1% but got revised up to +0.1% on Friday. Core MoM should be stable (DB +0.36% vs. +0.4% consensus) but only because Friday’s revisions saw it edge up from 0.3% to 0.4% last month. As strong prints from this time last year edge out of the data, the YoY rates should fall around two tenths each to 6.2% and 5.5% (consensus unchanged at 5.7%), respectively. If you want to get more into the weeds see DB’s Justin Weidner’s preview here.

Staying with inflation, US PPI on Thursday is also important as the medical services component feeds directly into the equivalent within the core PCE number (out Feb 24th).

Elsewhere in the US we have leading indicators (LEI) on Friday which are expected to pickup, but stay in negative territory in January after an awful print for December. January retail sales on Wednesday is also expected to bounce back after a poor end to the year. There are also a couple of regional factory surveys (NY on Weds and Philli Thurs) which along with industrial production (Weds) are also all expected to bounce to varying degrees. Thursday will also see the usual jobless claims alongside housing starts and building permits (1.350 vs. 1.337k).

Fed speakers will have plenty of opportunity to address the data throughout the week, with at least ten appearances scheduled so far. There are a number of appearances from ECB officials as well. See the highlights in the day by day week ahead calendar at the end as usual.

Shifting to Europe, UK CPI (Weds) and labour market data (tomorrow) will be in focus following the recent more dovish BoE meeting. This week's CPI will also be calculated with new weights so our UK economists put out a note on the potential impact of the changes here.

Turning to earnings now, with nearly 350 of the S&P 500 members having reported, there will still be a few notable corporates releasing results but the reality is that we are past the biggest potential market movers for the macro world.

Asian equity markets are starting an important week on the back foot. The Nikkei (-0.98%) is leading losses with the KOSPI (-0.91%) and Hang Seng (-0.47%) losing ground. Elsewhere, Chinese stocks are bucking the regional trend with the CSI (+0.62%) and Shanghai Composite (+0.53%) seeing decent gains.

Outside of Asia, US stock futures are indicating a negative start with contracts tied to the S&P 500 (-0.42%) and NASDAQ 100 (-0.49%) trading lower following a disappointing week on Wall Street.

In FX markets, the Japanese yen (-0.57%) continues to remain volatile, trading at 132.11 to the dollar ahead of the Japanese government’s official nomination on the new BOJ Governor scheduled tomorrow. On the oil front, prices are lower this morning with Brent futures (-1.03%) trading at $85.50/bbl and WTI (-1.17%) at $78.79/bbl after a strong past week.

Looking back on that week now, markets moved to price in more aggressive rate hikes from both the Fed and the ECB than had previously been expected. In the US, the fed futures market ended the week pricing a 5.188% rate for July meeting, marking the highest close of this cycle so far. That was an increase of +18.0bps on the week and +4.5bps on Friday. The prospect of more rate hikes reverberated in fixed income markets, with 10yr Treasuries yields up +7.4bps on Friday and +20.7bps over the week, reaching their highest levels since the end of December.

Over in Europe, overnight index swaps similarly moved to price in a higher terminal rate for the ECB at the July meeting, increasing by +18.4bps over the week (+5.8bps on Friday) to 3.501%, the highest level since the end of December. Fixed income markets extended their hawkish shift, with 2yr German bund yields jumping to their highest since 2008, up +7.2bps on Friday. This added to earlier increases, with 2yr bunds up +21.4bps over the week. 10yr bunds also fell back, as yields jumped +17.1bps over the week (+6.1bps on Friday).

Over in equity markets, last week was the worst of 2023 so far following a very strong start to the year. The S&P 500 was down -1.11% over the week (-0.22% on Friday), its largest decline in weekly terms since mid-December. The NASDAQ also saw its largest weekly loss since December, falling back -2.41% (-0.61% on Friday). The STOXX 600 also fell back, down -0.63% (-0.96% on Friday).

In other news from Friday, it was widely reported that Kazuo Ueda was set to be appointed as the BoJ's next governor. Ueda is an academic economist and former policy board member of the BoJ. According to our Japanese economists (link), Ueda is not considered to be hawkish and he would be wary of lifting monetary easing too early. However, foreign exchange markets saw Ueda in a more hawkish light, with the Yen reacting positively to the news, rallying + 1.33% against the US Dollar following the news, before reversing over the course of the day. The Nikkei closed up +0.59% on the week (+0.31% on Friday)

In other data releases on Friday, we had a downward surprise for UK GDP growth for December, which printed at -0.5% month-on-month (vs -0.3% expected). However, a technical recession (2 consecutive quarterly contractions) was just avoided with zero growth in Q4 as a whole, following a -0.2% contraction in Q2. Against this backdrop, the FTSE 100 was down -0.36% on Friday and fell back -0.24% on the week.

Over in commodities, oil prices saw further gains on Friday following the news that Russia would be cutting output from next month. WTI was up +8.63% for the week (+2.13% on Friday) to $79.72/bbl, and Brent crude rose up +8.07% (+2.24% on Friday) to $86.39/bbl. European natural gas futures fell -6.81% over the week (+2.30% on Friday).