


US equity futures rose, led by Nasdaq 100 contracts, setting up the tech-heavy index for a rebound as investors brace for Powell 2nd press conference in less than a week, in which he is widely expected to be more hawkish than he was during last week's FOMC. S&P 500 futures climbed 0.1% as of 7:45 a.m. ET while Nasdaq 100 contracts added 0.3%. The Bloomberg Dollar Spot Index retreated from the day’s highs, boosting most Group-of-1o currencies. Treasury yields pulled back after two days of outsized gains. Oil climbed with gold, while Bitcoin advanced for a second day.
Among notable moves in premarket trading, Activision gained after the video game publisher’s results beat expectations thanks to the performance of its big game titles. Bed Bath & Beyond sank 33% and was set for its biggest one-day drop in nearly six months (which in turn followed a record surge the day prior) after the troubled home-furnishings retailer said it’s planning to issue convertible preferred securities and warrants that would raise more than $1 billion. Bank stocks were lower in premarket trading Tuesday, putting them on track to fall for a third straight session. Nu Holdings Ltd/Cayman Islands and Block Inc. are among the most active financials stocks in early premarket trading, gaining 1% and 0.3% respectively. Here are some of the biggest US movers today:
The sharp rally in US stocks had cooled in the past two days amid mounting fears that resilient economic growth would keep the Fed hawkish for longer. Fallout from the flight over the US of an alleged Chinese spy balloon has also kept risk demand subdued. Fed Chair Jerome Powell is set to speak later today and investors are keen for clues on whether the central bank could further slow the pace of rate hikes over the next few months.
“There is little to cheer as the Fed hawks are returning to the playground, mixed with escalating geopolitical tensions with China,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank. Investor confidence about the outlook for technology stocks also appears to be fizzling out. Just as the Nasdaq 100 is getting close to entering a bull market, bearish bets on the index are piling up, signaling that the outperformance isn’t expected to last, according to Citi's Chris Montagu.
Heading into today's 12pm speech by Powell, Investors are assessing whether the Fed Chair will dampen market optimism for interest-rate cuts later in 2023, following January’s strong payrolls report and comments from other Fed officials about the possibility of a higher peak than policy makers had previously expected. Treasuries steadied after a two-day rout sparked by traders ramping up bets on future Fed tightening.
“I expect that Powell will drive home that point that they’ve done a lot and there’ll be a tightening that is going to impact the economy later on this year,” Jack McIntyre, a portfolio manager at Brandywine Global Investment Management LLC, said on Bloomberg Television. As discussed last night, market positioning is vulnerable for another delta squeeze should Powell prove to be more dovish than expected.
Meanwhile, Bloomberg notes that the fourth-quarter reporting season has done little to support optimism about corporate fundamentals. Earnings in sectors from energy to consumer discretionary have been coming in below pre-season estimates and companies are dialing back outlooks based on expectations growth will slow. Still, in a seemingly contrarian move, analysts have boosted stock-price targets, signaling how equity prices are being driven more by the Fed’s outlook than profits.
Geopolitical concerns are also back on the radar. As the US attempts to recover the sunken remains of a huge Chinese balloon it blasted out of the sky with a missile, Beijing acknowledged ownership of a second balloon spotted drifting over several Latin American countries.
In Europe, the Stoxx 600 advances 0.3% as investors focus on positive corporate earnings rather than the prospect of additional monetary tightening. Energy and banks are among the best performing sectors, boosted by BP Plc and BNP Paribas SA after their respective updates exceeded expectations. Turkish assets extended declines as the country continued to grapple with earthquakes that killed at least 4,000 people in Turkey and Syria. Here are some of the biggest European movers:
In FX, the Bloomberg Dollar Spot Index eased as the greenback was little changed or weaker against its Group-of-10 peers. The Australian dollar led gains after the RBA raised the Cash Rate by 25bps to 3.35%, as expected, while it stated that the Board expects further increases in interest rates and is resolute in its determination to return inflation to the target. RBA said inflation is expected to decline this year due to both global factors and slower growth in domestic demand, as well as noted that the path to achieving a soft landing remains a narrow one. Furthermore, it stated there is uncertainty around the timing and extent of the expected slowdown in household spending and that another source of uncertainty is how the global economy responds to the large and rapid increase in interest rates around the world, while these uncertainties mean that there are a range of potential scenarios for the Australian economy. Elsewhere, the Norwegian krone was the worst performer.
In rates, treasuries clawed back some of Monday’s heavy declines with two-year yields eased as much as 5bps ahead of comments from Powell. At 730am ET, Treasuries were mixed with the curve steeper as front-end unwinds portion of Monday’s selloff. Long-end is steady, leaving 2s10s, 5s30s spreads both steeper by 3bp-4bp on the day. Bunds lag over early London session amid debt sales. Focal points of US session include 3-year note auction at 1pm New York time, an hour after Fed Chair Powell is slated to make unscripted comments at an event. US yields little changed across long-end of the curve while front-end trades richer by ~3bp on the day; US 10-year yields around 3.64%, richer by ~1bp vs Monday’s close with bunds and gilts lagging by 4bp and 6bp in the sector. Treasury auction cycle begins with $40b 3-year note sale; $35b 10-year and $21b 30-year new issue auctions are ahead Wednesday and Thursday. WI 3-year yield at 4.09% is around 11bp cheaper than January’s, which stopped 2.3bp through the WI level.
In commodities, crude benchmarks rose for a second session, after Saudi Arabia signaled it was optimistic about oil demand by unexpectedly raising prices for customers in its main market of Asia, while also lifting those for Europe and the US. WTI added 2.4% to trade near $75.90. Pumping has begun on the Kirkuk-Ceyhan oil pipeline from Iraq; exports from Ceyhan expected to being on Tuesday, according to an energy official. TotalEnergies SE is being forced to cut production of fuels like gasoline and diesel at its French oil refineries for 48 hours, according to the CGT union. US official later confirmed the US is considering raising the tariff on Russian aluminium to 200% but stated no decision was made and no announcement is expected this week, according to Reuters. Spot gold is modestly firmer and at the top-end of the session's ranges, rising roughly 0.4% to trade near $1,874 while base metals are mixed overall with LME Copper moving back towards the USD 9k/t mark.
Looking at today's events, at 8:30 a.m. ET we’ll get US trade balance data. Fed Chair Jerome Powell will speak at 12 p.m., followed by comments from Fed Vice Chair for Supervision Michael Barr due at 2 p.m. At 1 p.m., the US will sell $40 billion in three-year notes. Earnings today include KKR, DuPont, Prudential, Chipotle and Carlyle.
To the day ahead now, and we’ll hear from an array of central bank speakers, including Fed Chair Powell at 12pm, followed by comments from Fed Vice Chair for Supervision Michael Barr due at 2 p.m. Other central bank speakers include the ECB’s Schnabel and Villeroy, BoE Deputy Governor Ramsden, Deputy Governor Cunliffe and Chief Economist Pill, and Bank of Canada Governor Macklem. Data releases include the US trade balance at 8:30am ET. At 1 p.m., the US will sell $40 billion in three-year notes. Earnings today include KKR, DuPont, Prudential, Chipotle and Carlyle. Finally, tonight will see US President Biden deliver the State of the Union address.
Market Snapshot
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A More detailed look at global markets courtesy of Newsquawk
APAC stocks eventually traded mixed after the weak lead from global counterparts as markets continued to ramp up hawkish Fed pricing, while the region also digested the RBA rate decision. ASX 200 was initially kept afloat amid strength in the energy sector after a rebound in oil prices although the index was later pressured after the RBA lifted the Cash Rate by 25bps to a fresh decade-high and signalled further rate increases ahead. Nikkei 225 was indecisive after mixed data in which household spending disappointed but wages topped forecasts, while the earnings deluge also continued. Hang Seng and Shanghai Comp. were varied with Hong Kong led by a rebound in the tech, healthcare and property sectors following yesterday’s underperformance although the mood in the mainland was less decisive owing to the recent spy balloon frictions and with a lack of fresh drivers aside from Wuhan relaxing property buying restrictions.
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European bourses are modestly firmer, Euro Stoxx 50 +0.2%, after yesterday's pronounced pressure and ahead of key Central Bank speak. Within Europe, sectors are mixed with Energy the clear outperformer post-BP, with the FTSE 100 bid, while Banking names are bolstered on yields/BNP Paribas. Stateside, the picture is very similar to the above though the NQ +0.3% is the incremental outperformer with US yields ever so slightly softer. BP (BP/ LN) Q4 2022 (USD): Adj. Net 4.81bln (exp. 5.11bln), Revenue 69.3bln (exp. 59.5bln). Adj. EPS 0.2644 (exp. 0.2713); Co. plans a further USD 2.75bln share buyback; Co. increases dividend by 10% Nintendo (7974 JT) 9-month (JPY): Net Profit 346mln, -5.8%; Operating Profit 410mln, -13%; Recurring Profit 482mln, -6%; Switch unit sales 14.91mln (prev. 18.95mln). FY22/23: Switch unit sales 18mln (prev. guided 19mln), Op. Income 480bln (exp. 500bln)
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Fixed Income
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US Event Calendar
DB's Jim Reid concludes the overnight wrap
Off to Brussels this morning so for those attending the DB Outlook lunch see you later. A few people asked me yesterday how our 1990s fancy dress quiz went at our kid's school on Saturday. What I can say is that there are few benefits of being an older parent other than when there is a 1990s music round. There were many blank faces in the room but a mispent youth (rather not being born then) meant I aced that round and our team won overall. I can't say I added a huge amount outside of music and sport though. There unfortunately wasn't a round on 800 years of financial market data. For those that want to see how close I looked to Keith Flint of the Prodigy and how much my wife looked like Geri from the Spice Girls please let me know and I'll send.
Markets got the week off to a "scary spice" start yesterday, with bonds and equities both soft, especially bonds. That was driven by growing doubts among investors about whether inflation would come down as hoped over the coming months, which in turn saw them price in a much more aggressive pace of rate hikes from central banks. Indeed, expectations of the Fed’s terminal rate for this cycle hit the first new high of the cycle since early November with the July contract ending yesterday with an implied rate of 5.157%, up from 4.81% at the recent lows last Wednesday. Indeed we’ve seen a full 25bps rate hike added to market pricing (and a bit more) since the jobs report came out on Friday. December 2023 contracts were up another 20bps yesterday and are now +48.5bps since just before the payroll report.
If investors are questioning the terminal rate once again, then this could have some big implications for markets. We wrote in our Sweet Spot note from January how a big driver of the post-October rally has been the fact that expectations of the Fed’s terminal rate stabilised around 5% and stopped rising after that point. But if we see expectations of the terminal rate take another leg higher, then clearly that would knock out a key pillar of support from the recent rally.
There was an inkling of this trend yesterday as Federal Reserve Bank of Atlanta President Bostic (non-voter this year) said that the strong Payroll report from last Friday increases the possibility that the Fed would have to increase rates further than previously forecast. President Bostic also echoed Chair Powell when referencing how inflation in core services ex-shelter has not improved as much as other sectors of the economy and sees that there is a lot of work left to do.
With investors pricing in a significantly more hawkish policy response, all eyes will be on Fed Chair Powell’s interview today at the Economic Club of Washington, DC. That’s taking place from 5pm London time, and will be the first chance he’s had to publicly respond to the bumper jobs report on Friday, which came out after his post-FOMC press conference last week. Clearly any implication that there are upside risks to the Fed’s rate outlook would validate the shift in market pricing over the last couple of days.
Ahead of that, US Treasuries lost ground across the board, with the 10yr yield up by +11.5bps on the day to 3.64% (although -2.2bps this morning in Asia). Bear in mind that on Thursday the 10yr yield hit an intraday low of 3.331%, so this is a significant bounceback. In the meantime, European sovereigns saw some sizeable shifts of their own, with yields on 10yr bunds (+10.3bps), OATs (+10.6bps) and BTPs (+13.3bps) rising significantly. The biggest underperformer were UK gilts though, where the 10yr yield rose by a massive +18.9bps on the day. That followed comments from the BoE’s Mann, who has recently been one of the most hawkish members on the MPC, but said that “in my view the next step in bank rate is still more likely to be another hike than a cut or hold.” She also struck some other hawkish tones, saying that “the consequences of under tightening far outweigh, in my opinion, the alternative.”
Equities didn’t react that well to the prospect of higher rates either, and the S&P 500 (-0.61%) lost ground for a second day running. Given the move in rates the sector skew was in favour of defensives with insurance (+1.0%), utilities (+0.9%), and food & beverage (+0.6%) outperforming while apparel (-2.0%), tech hardware (-1.7%), and media (-1.3%) all were the biggest laggards. With tech and communication stocks selling off the NASDAQ (-1.00%) and NYFANG index (-0.99%) underperformed. The one thing that made both indices look slightly better than otherwise was the fact that Tesla (+2.5%) rallied on news that Elon Musk was cleared by a federal jury and also that prices on the company’s model Y would be increasing.
Meanwhile Europe’s STOXX 600 was down -0.78%. Several negative geopolitical noises didn’t help either, and the NASDAQ Golden Dragon China index (-2.22%) that’s made up of US-listed Chinese companies struggled following the downing of the Chinese balloon by the US over the weekend. Later in the session, Bloomberg also reported from sources that the US was planning to place a 200% tariff on Russian aluminium.
While the speech is usually light on foreign policy, President Biden might address both of these issues in his State of the Union address to a joint session of Congress tonight. In a preview released by the White House yesterday, Biden will be calling for a quadrupling of the 1% tax on stock buyback that was part of the Inflation Reduction Act passed last year, as well as a new minimum tax on billionaires. We should note that given a Republican majority in the House of Representatives, neither is likely to become law. Other speaking points released include capping the price of insulin, using US-made products for the projects funded by the Administration’s infrastructure law, and aiming to reduce the deficit.
Elsewhere, the devastating earthquake that hit Turkey and Syria yesterday morning has had some ramifications across markets more broadly. In particular, oil prices were supported by the decision to stop oil flows to the Ceyhan export terminal, which exported around 1% of global oil supplies in January. That helped Brent crude close +0.49% higher at $80.99/bbl, although prices were knocked back later in the session amidst the global risk-off tone. Otherwise, Turkish assets saw significant losses yesterday, with the BIST 100 index down -1.35%, but only after recovering late in the session from an intraday low of -4.99%. In the meantime, yields on Turkey’s 2yr USD yield were up +43.2bps on the day.
Asian equity markets have somewhat stabilised this morning shrugging off the overnight losses on Wall Street. Across the region, the Hang Seng (+0.84%) is leading gains with the KOSPI (+0.48%), the CSI (+0.34%) and the Shanghai Composite (+0.33%) all reversing their previous session losses so far. Elsewhere, the Nikkei (-0.04%) is fractionally lower while the S&P/ASX 200 (-0.57%) is losing ground after the Reserve Bank of Australia (RBA) increased its cash rate for the ninth consecutive month (more on this below). Outside of Asia, US stock futures tied to the S&P 500 (+0.10%) and NASDAQ 100 (+0.13%) are inching higher.
In its latest monetary policy decision, the RBA raised its official cash rate by 25bps (as expected), taking it to 3.35%, its highest since September 2012, while warning of more rate hikes this year to dampen stubbornly high inflation. It was a pretty hawkish meeting. The Australian dollar has reacted positively, rallying + 0.67% to trade at 0.6929 against the US dollar at the time of writing.
Earlier data showed that real wages in Japan (+0.1% y/y) in December rose for the first time in nine months (v/s -1.5% expected) due to robust temporary bonuses to ease the impact of inflation. It followed a downwardly revised -2.5% drop recorded previously. Meanwhile, nominal cash earnings advanced more than anticipated to +4.8% y/y in December, notching the fastest growth since January 1997’s +6.6%. There are some likely distortions but this was still much higher than the +2.5% expected. See our economists' note on it here. On the contrary, household spending (-1.3% y/y) dropped for the second consecutive month in December (v/s -0.4% expected) as people spent less on food.
There wasn’t much data of note yesterday, although German factory orders were up by a stronger-than-expected +3.2% in December (vs. +2.0% expected). Otherwise, Euro Area retail sales were down -2.7% that same month (vs -2.5% expected).
To the day ahead now, and we’ll hear from an array of central bank speakers, including Fed Chair Powell, Fed Vice Chair for Supervision Barr, the ECB’s Schnabel and Villeroy, BoE Deputy Governor Ramsden, Deputy Governor Cunliffe and Chief Economist Pill, and Bank of Canada Governor Macklem. Data releases include the US trade balance and German industrial production for December. Earnings releases include BP and Linde. Finally, tonight will see US President Biden deliver the State of the Union address.