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Futures Fluctuate As Traders Await Next Inflation Signal

Futures Fluctuate As Traders Await Next Inflation Signal

US futures trade in a narrow range on Tuesday following Monday’s rout, as investors…



Futures Fluctuate As Traders Await Next Inflation Signal

US futures trade in a narrow range on Tuesday following Monday's rout, as investors weighed stronger-than-expected economic data and the potential that Federal Reserve rates will peak at a higher level. Contracts on the S&P 500 and the Nasdaq 100 were both up around 0.1% at 7:30am ET after trading on either side of the unchanged line earlier, signaling moderate gains for Wall Street after both underlying indexes closed lower on Tuesday, with hot US ISM services data fueling bets on a terminal Fed rate of close to 5% next year. The dollar weakened and Treasuries gained while bitcoin was unchanged.

In premarket trading, Gitlab shares jumped after the software company raised its full-year revenue forecast, while JPMorgan  Chase &gained slightly after losing its only sell-rating. Meanwhile, traders will have eyes on Apple as wait times for the company’s most expensive smartphones improved this week, indicating that supply chain disruptions are easing. The US Army on Monday awarded Bell Textron Inc. a contract worth up to $1.3 billion, beating out a Lockheed Martin Corp.-Boeing Co. team to replace the iconic Black Hawk helicopters by 2030. Here are all the notable premarket movers:

  • Alcoa (AA) shares rise almost 0.7% in premarket trading after Bloomberg reported that the US and European Union are weighing climate-based tariffs on Chinese steel and aluminum, citing people familiar with the matter.
  • General Electric (GE) rises 1.6% after it was upgraded to outperform at Oppenheimer, which highlighted the strength of the industrial and financial company’s aviation business.
  • Gitlab (GTLB) shares rallied 18% in premarket trading after the software company raised its full- year revenue forecast and reported third-quarter revenue that beat expectations. Analysts said they were positive about the company’s resilience and ability to grow despite economic uncertainty and widespread IT budget cuts.
  • MEI Pharma (MEIP) shares plummet 39% in premarket trading after the company and Kyowa Kirin said they’re discontinuing development of the experimental cancer drug zandelisib outside of Japan, citing guidance from US regulators. Truist Securities and BTIG downgrade MEI, while Stifel places estimates for the company under review.
  • Mirati Therapeutics, Inc. (MRTX) slides 14% in premarket trading after the company shared data from a study of its adagrasib therapy in combination with pembrolizumab (Keytruda) for patients with an advanced form of lung cancer, resulting in an objective response rate of 49%.
  • NRG Energy Inc. (NRG) agreed to buy Vivint Smart Home Inc. for $2.8 billion in an all-cash deal, accelerating its consumer-focused growth strategy. Shares decline 8.2%.
  • Sumo Logic (SUMO) shares jump 9.5% in US premarket trading after the analytics-platform provider boosted its revenue guidance despite a tough macroeconomic backdrop, with analysts particularly positive on the firm’s intention to shorten its path to profitability.
  • Vivint Smart Home (VVNT) jump 32% in premarket trading after NRG Energy said it agreed to buy the smart home platform company for $12 per share in cash. NRG Energy fell 8.5% in premarket trading.
  • Xponential Fitness (XPOF) was initiated with a buy rating and $29 price target on Tuesday at Citigroup, which said the firm is well positioned to grow within the boutique fitness space. Shares gain 8.5%.
  • Silvergate Capital shares slump as much as 14% in premarket trading Tuesday after NBC News reported that Senators including Elizabeth Warren, John Kennedy and Roger Marshall sent a request for information to CEO Alan Lane about the crypto bank’s dealings with Sam Bankman-Fried’s FTX exchange

On Monday, growth at US service providers unexpectedly accelerated in November (well it didn't really because the Service PMI continued to sink) as a measure of business activity jumped by the most since March 2021, suggesting the largest part of the economy remains resilient.

“Good news is bad news,” Goldman strategist Cecilia Mariotti wrote in a note, pointing to stronger-than-expected US economic data. “Our economists expect Fed Funds rates to peak at around 5-5.25%; a stronger US economy might translate into further pressure on risky assets near-term due to upward pressure on rates.”

As noted yesterday, despite Monday's rout, the S&P 500 remains on course for its biggest fourth-quarter gain since 1999, but gains have been receding in December after a stellar rally. The benchmark index has now traded lower for three consecutive days, with losses amounting to about 2% so far this month.

“We do not think the economic conditions for a sustained upturn are yet in place,” said Mark Haefele, chief investment officer at UBS Global Wealth Management, noting that growth is slowing and central banks are still raising rates. “We think the inflection point will be reached when a trough in economic activity is in sight and investors can confidently expect rate cuts, rather than a slower pace of hikes.”

The resilient US economy and sticky inflation are countering optimism about a reopening in China, with money market futures and economists suggesting the Fed will need to push rates to a higher peak than previously expected. Swaps showed an increase in expectations for where the Fed terminal rate will be, with the market indicating a peak above 5% in the middle of 2023. The current benchmark sits in a range between 3.75% and 4%.

“Central banks will likely continue to have an outsize impact on stocks in December,” said Kristina Hooper, chief global market strategist at Invesco. “In addition, lowered earnings revisions could exert downward pressure on stocks. Therefore, I expect significant volatility for the month, although the bias is likely upward given historical trends.”

European shares slipped and oil extended declines as traders digested strong US ISM Services PMIs out yesterday. Euro Stoxx 50 falls 0.4%. Energy, financial services and retailers are the worst performing sectors. Here are some of the biggest European movers today:

  • Ashtead Technology rises 10% to a record high after the company announced the £20m acquisition of Hiretech, which it expects to result in double-digit earnings accretion in FY23 and generate returns “significantly in excess” of cost of capital in the first full year of ownership.
  • SSP shares rise as much as 7.5%, the most since May 25, after the UK catering and concession- services company reported FY results that Morgan Stanley said were “a tad ahead” of the pre-announced expectations.
  • Marston’s shares climb as much as 4.4% after the UK pub operator reported FY results, with revenue from continuing operations beating analyst expectations.
  • UCB rises as much as 3.1% after getting clarity on the launch of its bimekizumab drug in the US in 2023 should be a catalyst for the stock to re-rate, Barclays writes in a note upgrading the Belgian biopharma to overweight and hiking its PT.
  • Aéroports de Paris drops as much as 15% after an offering of 3.87m shares by Royal Schiphol Group priced at €133 apiece, a ~9.9% discount to the last close.
  • Scatec falls as much as 5% after Kepler Cheuvreux cut its recommendation for the Norwegian renewable energy firm to hold from buy, citing a lack of short-term triggers for the company’s shares.
  • Netcompany shares decline as much as 4.1%, the most since Oct. 19, as Handelsbanken cuts its short-term rating on the IT firm to sell from hold on doubts about its current strategy.
  • Telecom Plus declines as much as 2.1% after an offering of 3.5m shares by Chairman Charles Wigoder and others priced at £24 apiece, a discount of 1.4% to the last close.

Earlier in the session, Asian stocks declined as a rebound in Chinese shares lost momentum after unexpectedly strong US economic data renewed concerns that the Federal Reserve will need to push rates to a higher peak than previously expected.   The MSCI Asia Pacific Index dropped as much as 1.2%, with Chinese internet firms and Asian chipmakers contributing the most to the benchmark’s drop. Shares in Hong Kong dropped as investors monitored China’s move toward exiting its Covid Zero policy. Gauges in Taiwan, South Korea and Singapore fell while Vietnam’s equity benchmark sank about 4% amid profit taking. Asia’s drop was limited relative to losses in the US, where about 95% of the S&P 500’s companies were in the red. Stocks in Japan edged up as investors weighed dovish remarks from Bank of Japan Governor Haruhiko Kuroda.  Still, Asian equities are caught in a tug-of-war between a slowing global growth outlook and optimism around China’s reopening, with expectations of regional earnings estimates taking a further hit. “Near-term earnings downgrades are likely to persist amid weak macro and industrial data across the region and sectors,” Goldman Sachs strategists including Timothy Moe wrote in a note.   Asian stocks were headed toward a technical bull market up until Monday, mainly driven by optimism over China’s easing restrictions. Beijing announced it will scrap Covid testing requirements for most public venues.

Japanese stocks traded in a narrow band amid lingering concerns over the outlook for US monetary policy and the impact of the stronger dollar and weaker yen.  The Topix Index rose 0.1% to 1,950.22 as of market close Tokyo time, while the Nikkei advanced 0.2% to 27,885.87. Mitsui & Co. contributed the most to the Topix Index gain, increasing 2%. Out of 2,164 stocks in the index, 801 rose and 1,264 fell, while 99 were unchanged. “While the yen has been strengthening since November, the recent slight halt to the appreciation of the yen is a positive factor for corporate earnings performance,” said Ayako Sera, a market strategist at Sumitomo Mitsui Trust Bank Ltd.

Australian stocks also declined, with the S&P/ASX 200 index falling 0.5% to close at 7,291.30, weighed by banks and mining shares, after Australia’s central bank raised its key interest rate for an eighth consecutive month and said it expects to tighten policy further as it seeks to cool the hottest inflation in three decades. In New Zealand, the S&P/NZX 50 index fell 0.4% to 11,631.60.

In FX, the Bloomberg Dollar Spot Index was largely unchanged on the day as investors weighed the possibility that the Fed will need to keep raising rates faster than other central banks, after a jump in ISM services data on Monday and last week’s strong jobs reading suggested that ongoing inflation risks will require more hikes (this of course will change when first PPI then CPI both miss over the next two weeks).

  • The yen recovers from a fall to the day’s low of 136.29 yen, after Governor Haruhiko Kuroda said the Bank of Japan will continue its monetary easing even if wages rise 3%, while the Australian dollar gained after the RBA raised its key interest rate to a 10-year high and said it expects to tighten policy further. Easing of Covid testing requirements in Beijing also boosted risk assets
  • The euro inches up above 1.05, holding close to a five-month high of 1.0595 touched on Monday. EUR/USD one- week implied volatility rises to 12.97%, its highest since Nov. 16, as investors prepare for the potential of big currency moves after next week’s FOMC meeting
  • The yuan halted five straight days of gains as the dollar strengthened after upbeat US data bolstered the case for more Federal Reserve rate hikes to counter inflation. China’s government bond yields rose tracking a selloff in the credit market. USD/CNH rose 0.2% at 6.9893; USD/CNY gains 0.5% to 6.9917. The offshore yuan had risen as much as 0.4% earlier in the session after Beijing said that negative Covid tests would no longer be needed to enter a range of public venues

In rates, Treasuries slightly richer across the curve, with gains led by front-end and belly following a wider bull-steepening rally in gilts. The 10-year Treasury yield slipped to 3.56%, still holding near the 3.61% hit after Monday’s ISM reading added fuel to traders’ bets on how high Fed interest rates might ultimately go. The two-year Treasury yield falls 2.5 basis points to 4.36%. The 2s10s spread slightly steeper on the day, rebounding from new cycle lows reached Monday. Treasury yields richer by as much as 2.5bp across front-end of the curve, steepening 2s10s by 1.5bp on the day after the spread dropped below -82bp Monday; 10-year yields around 3.56% with bunds outperforming by 2bp in the sector. The Gilt curve is little changed with 2s10s widening 4.1bps. Treasury curve bear steepens.

In commodities, WTI and Brent futures were consolidating after yesterday’s ISM-induced declines which saw the most liquid contract settle lower by almost USD 3/bbl a piece; however, pressure has resumed as the morning progresses as WTI drifts 1.2% lower to trade near $76.01. Spot gold is flat under USD 1,775/oz with some overnight resistance seen near that level, while the 200 DMA resides at 1,794/oz and the 21 DMA at 1,757.90/oz. Base metals are mixed, in-fitting with the cautious risk tone and swings in the Dollar, with 3M LME still under the USD 8,500/t mark but within a contained range.

Looking to the day ahead now, and data releases include German factory orders for October, the November construction PMIs from Germany and the UK, and the US trade balance for October. Otherwise, the US Senate run-off election in Georgia will be taking place.

Market Snapshot

  • S&P 500 futures up 0.1% to 4,008.75
  • STOXX Europe 600 down 0.2% to 440.64
  • MXAP down 0.9% to 157.60
  • MXAPJ down 1.3% to 513.83
  • Nikkei up 0.2% to 27,885.87
  • Topix up 0.1% to 1,950.22
  • Hang Seng Index down 0.4% to 19,441.18
  • Shanghai Composite little changed at 3,212.53
  • Sensex down 0.3% to 62,645.63
  • Australia S&P/ASX 200 down 0.5% to 7,291.27
  • Kospi down 1.1% to 2,393.16
  • German 10Y yield down 1.1% to 1.86%
  • Euro little changed at $1.0487
  • Brent Futures up 0.2% to $82.82/bbl
  • Gold spot up 0.2% to $1,771.99
  • U.S. Dollar Index little changed at 105.33

Top Overnight News from Bloomberg

  • The year-end holidays are failing to lift the glum outlook for trade as conditions continue to deteriorate across the world’s factories and ports. At the start of December, all four Bloomberg Trade Tracker sentiment gauges were below average, with two even lower in below-normal territory
  • European Central Bank Chief Economist Philip Lane said consumer-price growth is probably near its zenith, while acknowledging that borrowing costs will be raised again
  • German factory orders rose in October, a sign of hope for manufacturers in Europe’s largest economy as they struggle with inflation and elevated energy costs due to Russia’s war in Ukraine
  • China is reporting fewer Covid-19 cases as a wave that started to accelerate last month appears to be tailing off amid a pullback in the sweeping testing regime that saw a negative result needed to even enter a public park
  • China has taken several significant steps recently to reverse the country’s worst property slump in modern history, leaving economists searching for signs of turnaround clues. Home sales, land purchases, new housing starts and developer financing will all be key to showing how well the sector is able to recover in the coming year, economists told Bloomberg

A more detailed look at global markets courtesy of Newsquawk

Asia-Pacific stocks were somewhat mixed with early headwinds from Wall St where risk assets were pressured as yields and the dollar gained following strong ISM Services PMI data which stoked concerns for a more aggressive Fed. However, some of the initial losses in the regional bourses were reversed owing to further China reopening efforts. ASX 200 was subdued amid mixed data releases and after the RBA rate decision where the central bank delivered an 8th consecutive rate increase, as well as signalled further hikes ahead. Nikkei 225 was kept afloat after BoJ Governor Kuroda reaffirmed sticking with current monetary policy but with gains capped by mixed Household Spending data and the largest decline in real cash earnings in 7 years. Hang Seng and Shanghai Comp were choppy with initial pressure amid the uninspired mood across the region although the losses were briefly pared owing to further reopening efforts in which Shanghai and Beijing scrapped COVID test requirements for more public venues, while reports also noted that China could announce 10 supplementary COVID measures as soon as Wednesday and could downgrade COVID to a category B management as early as January.

Top Asian News

  • Beijing city government said it no longer requires negative PCR test results for people entering supermarkets and commercial buildings, while it still requires a negative test result to enter internet cafes, bars, KTV lounges, gyms and elderly care institutions. It was also later reported that the Beijing capital airport no longer requires negative COVID test results from people entering the airport, according to Reuters.
  • PBoC's recent RRR cut could push the 5-year LPR lower this month, according to Shanghai Securities News.
  • BoJ Governor Kuroda said it is premature to debate specifics on the BoJ's monetary policy framework, when asked about board member Tamura's comments calling for a review of the current framework, while Kuroda added that when the achievement of the inflation target comes into sight, the BoJ will likely debate a path toward an exit from easy policy. Kuroda also said the benefits of the current monetary policy currently outweigh the costs and that the BoJ will continue QQE to ensure companies can smoothly raise wages.
  • RBA hiked rates by 25bps to 3.10%, as expected, while it repeated that the board expects to increase interest rates further over the period ahead but is not on a pre-set course and that inflation in Australia is too high. RBA said the board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that, while its priority is to re-establish low inflation and return inflation to the 2%–3% target over time.

In Europe it has been a choppy session thus far across equities as the region looks for direction following the mixed APAC handover and after the post-ISM losses. Currently, European bourses are lower by circa. 0.5% having dipped a touch heading into US trade with fundamental drivers limited. Sectors in Europe are predominantly in the red with a slight defensive tilt, with Utilities, Media, Telecoms, Food & Beverages and Optimised Goods in the green, whilst Energy, Autos, Retail and Financial services reside at the foot of the bunch. US equity futures move between mild losses and gains in search of the next catalyst, with a relatively broad-based action seen across the ES, NQ, YM, and RTY. TSMC (TSM) is to more than triple its investment in Arizona, US to USD 40bln, via FT; will, on Tuesday, announce plans for a second fab to manufacture 3NM/N3 chips from 2026, according to FT sources.

Top European News

  • ECB's Lane said he is confident that the EZ is near the peak of inflation but more hikes are needed, and added that inflation peak may have been reached or will come in early 2023 and the bulk of the work has been done. Re. rates: "... when we take future interest rate decisions, including in December, we should take into account the scale of what we have already done. So the basis for the decision will be different."
  • ECB's Herodotou said does not see a "hard-landing" in the Eurozone economy; no material de-anchoring of inflation expectations. There will be another hike but we are very close to the neutral rate, via Reuters.
  • Barclaycard UK November consumer spending rose 3.9% Y/Y vs prev. 3.5% increase in October.


  • DXY briefly eclipsed Monday's best to a 105.50 peak before fading in limited newsflow and as UST yields ease.
  • Action which comes to the modest benefit of peers, ex-CAD given softer benchmark crude prices and pre-BoC; USD/CAD 1.3600.
  • Aussie is the modest outperformer following a 25bp RBA hike and guidance for further inflation-justified tightening, AUD/USD 0.673+ at best.
  • JPY has derived some modest benefit from the USD pullback, though USD/JPY remains near Monday's peak.
  • GBP and EUR were unfased by the morning's data points, while remarks from ECB's Lane are notable but haven't altered December's pricing much.
  • PBoC set USD/CNY mid-point at 6.9746 vs exp. 6.9773 (prev. 7.0384)
  • Norges Bank Regional Network (Q4): output index 6-months ahead -0.57 (Prev. -0.16).


  • Core benchmarks are little changed overall, with USTs and Bunds marginally outpacing their UK peer at present.
  • However, this relative outperformance is limited in nature and has eased from best levels, while EGBs/Gilts have absorbed the morning's supply well thus far.


  • WTI and Brent futures were consolidating after yesterday’s ISM-induced declines which saw the most liquid contract settle lower by almost USD 3/bbl a piece; however, pressure has resumed as the morning progresses, benchmarks lower by circa. USD 1/bbl.
  • Spot gold is flat under USD 1,775/oz with some overnight resistance seen near that level, whilst the 200 DMA resides at 1,794/oz and the 21 DMA at 1,757.90/oz.
  • Base metals are mixed, in-fitting with the cautious risk tone and swings in the Dollar, with 3M LME still under the USD 8,500/t mark but within a contained range.
  • Russian Deputy PM Novak says they may reduce oil production, but not by much, via Tass. Domestic oil production in December will remain at November's level.


  • Kyiv reportedly used unmanned drones to strike two bases in the heart of Russia, while the drones were launched from Ukrainian territory and two planes were destroyed at one of the Russian bases with several more damaged, according to NYT citing a Ukrainian official.
  • North Korea ordered its military to fire artillery into the sea in response to South Korean drills, according to KCNA.
  • North Korea fires 10 additional artillery shots in the maritime buffer zone... A total of 100 rounds, according to Yonhap.
  • China's Defence Ministry dismissed a Pentagon report from last month which stated that China would likely have a stockpile of 1,500 nuclear warheads by 2035 if it continues at the current pace of its nuclear build-up, while China dismissed the report as unfair "gesticulation" and speculation, according to Reuters.

US Event Calendar


  • 08:30: Oct. Trade Balance, est. -$80b, prior -$73.3b

DB's Jim Reid concludes the overnight wrap

I've always thought that my career would be protected from the invasion of tech, robots and AI, by the fact that no one would ever want to read the "Early Morning Robot". However I was shocked to read yesterday that the OpenAI foundation have created a bot that would have scored top marks in an academic written assessment. It was even able to write limericks. No doubt it has decent knees and a strong back too. So this morning I'm wondering what purpose I actually serve in life. I'm sure a robot would bring up my kids better too.

It doesn’t need a robot to tell you that markets got the week off to a rocky start yesterday, with solid US data releases knocking back investors’ hopes that the Fed might become more dovish in the days, weeks and months ahead. In particular, the ISM services index painted a very different picture to the manufacturing contraction last week, with the 56.5 reading surpassing the estimates of all 60 economists on Bloomberg. That built on the more positive economic signals from last Friday’s jobs report. The S&P 500 (-1.79%) lost further ground as markets grew sceptical that the Fed would be easing off any time soon with numbers like these.

One of our big calls for next year is that something normally breaks when the Fed has a hiking cycle. That's certainly been the case over the last 50 years and we’re not sure why this time should be different given the illiquidity and leverage in the system. One of our areas of concern has been the shadow banking system and more specifically private markets. It was interesting that news last week that Blackstone has limited redemptions from one of its private real estate funds caused some nerves in private markets. That follows several warnings by high-profile private capital managers and investors of portfolio write-downs at year end. To further discuss the general topic, Luke Templeman on my team will host a webinar this Thursday at 2pm UK time. He will discuss the risks in the private capital market and how they may spread in 2023 and beyond. You can register here and see the original report on risks in private markets here.

Back to markets and in terms of the specifics of the ISM release, the 56.5 print in November was a big contrast with consensus expectations, which had been for a 53.5 reading that would’ve been the lowest since May 2020. Furthermore, the employment component moved out of contractionary territory with a 51.5 reading, which echoed the better-than-expected numbers in the jobs report, while the prices paid component remains still elevated at 70, lest we forget the still inflationary backdrop. In addition just as the ISM services surprised on the upside, October’s factory orders similarly surprised in a positive direction at +1.0% (vs. +0.7% expected), whilst the final composite PMI was also revised up a tenth from the flash reading to 46.4.

In light of the various releases, expectations of the Fed terminal rate priced for May 2023 moved up by +9.5bps on the day to 5.01%, crossing the 5% threshold again. That’s a noticeable shift from where it was just before Friday’s jobs report, when it hit a low of 4.83%, and means that most of the moves lower after Chair Powell’s Wednesday speech have now reversed. Meanwhile, pricing for end-2023 rose by an even larger +16.8bps to 4.60%, as markets priced in that policy will be restrictive for longer with data like this. In turn, this all prompted a big shift higher in Treasury yields as well, with the 10yr yield up +8.7bps on the day to 3.57%, and real yields up by +12.0bps to 1.17%. In the meantime, the various releases saw the dollar index strengthen in the aftermath, moving up from its weakest intraday level since June to gain +0.74% on the day. This morning in Asia, yields on 10yr USTs are fairly stable, trading at 3.58%.

The positive data meant equities lost decent ground yesterday thanks to the concern about further rate hikes. To be fair, the S&P 500 had already opened lower, but the ISM services reading saw it take another leg down to close the day with a -1.79% loss. The declines were broad-based across various sectors, but the cyclical industries performed worst of all, with consumer discretionary (-2.95%) and energy (-2.94%) the biggest laggards. The picture was also subdued in Europe, where the STOXX 600 fell -0.33%.

Overnight, we’ve had some further central bank news after the Reserve Bank of Australia (RBA) delivered a third consecutive interest rate hike of 25bps, taking the official rate to 3.1% - the highest level since 2012 after the fastest tightening cycle in a generation. Following the announcement, RBA Governor Lowe said the board “expects to increase interest rates further over the period ahead”. The comments supported the Australian dollar (+0.49%), pushing the currency to $0.673, while 2yr bond yields jumped 9bps to 3.07%.

Elsewhere in Asia stock markets are mixed this morning after Wall Street sold off overnight. As I type, the Hang Seng (-0.93%) and the Hang Seng Tech index (-1.92%) are both trading in negative territory despite Beijing easing some Covid test requirements for the city. Meanwhile, the KOSPI (-0.71%) is weak while the Nikkei (+0.37%) and the CSI (+0.55%) are higher in early trading with the Shanghai Composite (-0.08%) struggling to gain traction. In overnight trading, US stock futures are indicating a mixed start with contracts on the S&P 500 (+0.06%) just above flat while those on the NASDAQ 100 (-0.04%) are oscillating between gains and losses.

Early morning data showed that household spending in Japan (+1.2% y/y) advanced for a 5th consecutive month in October and slightly better than the market estimate of 0.9% as Covid cases continued to decline. At the same time, elevated inflation saw Japan’s real wages (-2.6% y/y) post their biggest fall in more than seven years (v/s -2.2% expected). That compares with a downward revised fall of -1.2% in the preceding month.

Back in Europe, there wasn’t a great deal of newsflow yesterday, with the final composite PMIs painting a very similar picture to the flash prints. Indeed, the Euro Area composite PMI was completely unchanged from the flash reading at 47.8. We didn’t get much in the way of ECB headlines either, although Ireland’s central bank Governor Makhlouf said that a 50bp hike “is about where we’ll end up”. That’s in line with market expectations for next week’s meeting, which have continued to drift closer to the 50bps point over the last month, with 53.9bps currently priced in.

Sovereign bonds had a divergent performance against this backdrop, with yields on 10yr bunds up +2.6bps on the day, yields on 10yr OATs up +0.9bps, but yields on 10yr BTPs down -1.2bps. Gilts were an outperformer however, which followed weekend comments from the MPC’s Dhingra suggesting that the BoE should not raise rates as far as the 4.5% markets are pricing. 10yr yields fell -4.8bps.

Looking ahead, today is an important one in US politics as the Georgia Senate run-off election takes place. This doesn’t have quite the significance it did two years ago, since the Democrats already have 50 seats and will control the Senate regardless of the result thanks to Vice President Harris’ casting vote. But it will still have important implications, since a 51-49 margin means the Democrats could still win a Senate vote even if they lost one of their number like Senator Joe Manchin. Furthermore, since Senate seats only come up every 6 years with just a third of the chamber elected each time, a victory for either side would make it easier for them to gain control in the 2024 and 2026 elections as well, since that Georgia seat wouldn’t be up for election again until 2028.

To the day ahead now, and data releases include German factory orders for October, the November construction PMIs from Germany and the UK, and the US trade balance for October. Otherwise, the US Senate run-off election in Georgia will be taking place.

Tyler Durden Tue, 12/06/2022 - 08:08

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New ways to protect food crops from climate change and other disruptions

“There’s no doubt we can produce enough food for the world’s population – humanity is strategic enough to achieve that. The question is whether…



“There’s no doubt we can produce enough food for the world’s population – humanity is strategic enough to achieve that. The question is whether – because of war and conflict and corruption and destabilization – we do,” said World Food Programme leader David Beasley in an interview with Time magazine earlier this year.    

Credit: NMBU

“There’s no doubt we can produce enough food for the world’s population – humanity is strategic enough to achieve that. The question is whether – because of war and conflict and corruption and destabilization – we do,” said World Food Programme leader David Beasley in an interview with Time magazine earlier this year.    

Indeed, projections show that we are not on track to achieve Sustainable Development Goal 2 of Zero Hunger by 2030. As climate and security crises continue to destabilise our food sources, researchers are taking a critical look not just at how we produce food – but at the entire systems behind our food supplies. In this case, the systems behind the seeds that produce our food crops.    

“Whilst adapting crops to climate change and conserving their variation is essential for food security, these measures are meaningless if farmers do not have access to the seeds,” says crop scientist and food system expert Ola Westengen. Westengen leads the team of researchers from the Norwegian University of Life Sciences (NMBU) who recently reviewed the state of seed systems for small-holder farmers in low/middle income countries. Their findings are now published in the Proceedings of the National Academy of Sciences (PNAS).   

What are seed systems?    

Seed systems are the provision, management and distribution of seeds. They cover the entire seed chain, from the conservation of their diversity and variety development, to their production and distribution, and the rules that govern these activities.  In short, they are the structures that make seeds available to farmers so that crops can be sown, harvested and end up on our plates.    

Whilst a well-functioning seed system will ensure seed security for all farmers, the researchers say that, in practice, it is rarely the case that seed systems function as well as they might. Seed systems can be disrupted by conflict and disasters, as well as by problems stemming from social inequality, lack of coordination or inappropriate policies.      

What does this study tell us that we don’t already know?   

“There are recent innovations and investments by governments and donors to improve farmers’ access to diverse crop varieties and quality seeds,” explains Teshome Hunduma, a seed governance researcher and co-author of the study. “For example, there are now more flexible policies and regulations that encourage diversity in the seed systems used by farmers, rather than pushing farmers to switch to commercial seed systems that focus on less diverse commodity crops – which is the norm.” Commodity crops are those grown in large volume and high intensity for the purpose of sale, as opposed to those grown by small-holder farmers for direct processing and consumption.   

“The study highlights emerging initiatives that are helping farmers to secure food supplies, such as participatory plant breeding,” says Teshome. Participatory plant breeding is the development and selection of new crop varieties where the farmers are in control. Farmers, who know the needs of their farms best, work with researchers and others to improve crops and develop plant varieties that are in line with their household needs and culture, and that are resilient to environmental and climate challenges.    

“Farmers prefer and need different types of seeds, based on diverse social, cultural and ecological conditions,” adds ethnobotanist and co-author Sarah Paule Dalle.       

The study discusses various disruptions to farmer’s access to seeds. Social inequality is one such disruption. How so?   

“A seed system that only serves a segment of a farming society contributes to seed insecurity,” replies Teshome. “For example, commercial seed systems deliver high-yielding varieties of quality hybrid seeds. Whilst wealthy farmers can afford such seeds, poor farmers can’t.”    

“Similarly, whilst commercial seed systems that focus on commodity crops may benefit men who might primarily be interested in market value, such systems have little to offer women who want crops that provide household nutrition and meet their cultural preferences.”   

“This means poor farmers and women do not have the same access to seeds that meet their needs. The result is seed, and thus food, insecurity due to social and economic inequality.”     

Political-economic factors have driven the globalization of food systems over the last decades, which also includes seed systems. “Seeds have become big business”, say the researchers. According to studies quoted in the article, the four largest multinational companies in seed trade today control about 60% of the ~50 billion USD global commercial seed market. The large private actors have the power not only to shape markets, but also to influence science and innovation agendas and policy frameworks.     

This can be problematic, say the researchers, when private sector research and development typically focuses on the most profitable crops, such as maize and soy. Crops grown and consumed by subsistence farmers are thus largely neglected, and the potential of crop diversity – the foundation of agriculture – remains largely untapped. Technology that could help develop more robust varieties remains hypothetical.   

How does the ownership of crop diversity threaten food supplies and what can be done?      

The term crop diversity refers both to different crops and different varieties of a crop. According to the Global Crop Diversity Trust (one of the world’s primary international organizations on crop diversity conservation), securing and making available the world’s crop diversity is essential for future food and nutrition security.      

“Plant breeders and scientists use crop diversity to develop new, more resilient and productive varieties that consumers want to eat, that are nutritious and tasty, and that are adapted to local preferences, environments and challenges,” explains Benjamin Kilian, a plant genetics expert at the Global Crop Diversity Trust. The Crop Trust, together with the Norwegian University of Life Sciences, implements the major project from which this study emerged: Biodiversity for Opportunities, Livelihoods and Development (BOLD). Coordinated by Kilian, the project supports the conservation and use of crop diversity to strengthen food and nutrition security on a global scale. It builds on the Crop Wild Relatives project and is funded by the Norwegian government.   

“In the BOLD project, researchers work with genebanks, plant breeders and others in the seed value chain to co-develop seed systems that are both resilient to climate stresses and inclusive of small-holder farmers on the frontline of adaptation,” adds Westengen.     

Will access to seeds in the vulnerable areas that you are studying be improved in time to make a difference?   

“We hope so, if we make the right moves to include small-holder farmers in seed system development,” says Dalle. “A well-functioning seed system should also be resilient. That is, it should withstand shocks such as drought or pandemics and breakdowns or disruptions such as war and conflict.”    

“To do this, the system should promote a diversity of seeds, both local varieties and those improved to better adapt to stresses. It should also involve diverse groups of people such as farmer cooperatives/groups, and both public and private companies to increase the choice of seeds and seed sources. During lockdowns in the COVID-19 pandemic, for example, farmers’ own seed systems enabled access to seeds in developing countries when the activities of private companies and agro-dealers were restricted,” explains Dalle.   

Westengen summarizes: “Our study highlights links between the crucial work of the Global Crop Diversity Trust and the farmers on the frontline of adapting our food systems to climate change. It is an argument for co-designing seed system development in full cooperation with farmers and other actors in the seed system. This way, efforts can meet the needs of various groups of farmers in different agroecological contexts. There is no one-size-fits-all; if there is one natural law in biology, it is that diversity is key to future evolution. That also goes for seed systems – and food system development.”   

Navigating towards resilient and inclusive seed systems by Ola T. Westengen, Sarah Paule Dalle and Teshome Hunduma Mulesa was published in Proceedings of the National Academy of Sciences (PNAS) this week. PNAS is widely considered one of the most prestigious and highly cited multidisciplinary research journals.   

About the Norwegian University of Life Sciences (NMBU)  
NMBU’s research and education enables people all over the world to tackle the big, global challenges regarding the environment, sustainable development, how to improve human and animal health, renewable energy sources, food production, and land- and resource management. 

 About the Crop Trust 
The Crop Trust is an international organization working to conserve crop diversity and thus protect global food and nutrition security. At the core of Crop Trust is an endowment fund dedicated to providing guaranteed long-term financial support to key genebanks worldwide. The Crop Trust supports the Svalbard Global Seed Vault and coordinates large-scale projects worldwide to secure crop diversity and make it available for use. The Crop Trust is recognized as an essential element of the funding strategy of the International Treaty on Plant Genetic Resources for Food and Agriculture.  

About the BOLD Project 
BOLD (Biodiversity for Opportunities, Livelihoods, and Development) is a major 10-year project to strengthen food and nutrition security worldwide by supporting the conservation and use of crop diversity. The project works with national genebanks, pre-breeding and seed system partners globally. Funded by the government of Norway, BOLD is led by the Crop Trust in partnership with the Norwegian University of Life Sciences and the International Plant Treaty. 

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A Federal Reserve Pivot is not Bullish

An old saying cautions one to be careful of what one wishes for. Stock investors wishing for the Federal Reserve to pivot may want to rethink their logic…



An old saying cautions one to be careful of what one wishes for. Stock investors wishing for the Federal Reserve to pivot may want to rethink their logic and review the charts.

The second largest U.S. bank failure and the deeply discounted emergency sale of Credit Suisse have investors betting the Federal Reserve will pivot. They don’t seem to care that inflation is running hot and sticky, and the Fed remains determined to keep rates “higher for longer” despite the evolving crisis.

Like Pavlov’s dogs, investors buy when they hear the pivot bell ringing. Their conditioning may prove harmful if the past proves prescient.

The Bearish History of Rate Cuts

Since 1970, there have been nine instances in which the Fed significantly cut the Fed Funds rate. The average maximum drawdown from the start of each rate reduction period to the market trough was 27.25%.

The three most recent episodes saw larger-than-average drawdowns. Of the six other experiences, only one, 1974-1977, saw a drawdown worse than the average.  

So why are the most recent drawdowns worse than those before 1990? Before 1990, the Fed was more active. As such, they didn’t allow rates to get too far above or below the economy’s natural rate. Indeed, high inflation during the 1970s and early 1980s forced Fed vigilance. Regardless of the reason, higher interest rates helped keep speculative bubbles in check.

During the last 20 years, the Fed has presided over a low-interest rate environment. The graph below shows that real yields, yields less inflation expectations, have been trending lower for 40 years. From the pandemic until the Fed started raising rates in March 2022, the 10-year real yield was often negative.

real yields wicksell

Speculation often blossoms when interest rates are predictably low. As we are learning, such speculative behavior emanating from Fed policy in 2020 and 2021 led to conservative bankers and aggressive hedge funds taking outsized risks. While not coming to their side, what was their alternative? Accepting a negative real return is not good for profits.

We take a quick detour to appreciate how the level of interest rates drives speculation.

Wicksell’s Elegant Model

A few years ago, we shared the logic of famed Swedish economist Knut Wicksell. The nineteenth-century economist’s model states two interest rates help assess economic activity. Per Wicksell’s Elegant Model:

First, there is the “natural rate,” which reflects the structural growth rate of the economy (which is also reflective of the growth rate of corporate earnings). The natural rate is the combined growth of the working-age population and productivity growth. Second, Wicksell holds that there is the “market rate” or the cost of money in the economy as determined by supply and demand.

Wicksell viewed the divergences between the natural and market rates as the mechanism by which the economic cycle is determined. If a divergence between the natural and market rates is abnormally sustained, it causes a severe misallocation of capital.

The bottom line:

Per Wicksell, optimal policy should aim at keeping the natural and market rate as closely aligned as possible to prevent misallocation. But when short-term market rates are below the natural rate, intelligent investors respond appropriately. They borrow heavily at the low rate and buy existing assets with somewhat predictable returns and shorter time horizons. Financial assets skyrocket in value while long-term, cash-flow-driven investments with riskier prospects languish.

The second half of 2020 and 2021 provide evidence of Wicksell’s theory. Despite brisk economic activity and rising inflation, the Fed kept interest rates at zero and added more to its balance sheet (QE) than during the Financial Crisis. The speculation resulting from keeping rates well below the natural rate was palpable.

What Percentage Drawdown Should We Expect This Time?

Since the market experienced a decent drawdown during the rate hike cycle starting in March 2022, might a good chunk of the rate drawdown associated with a rate cut have already occurred?

The graph below shows the maximum drawdown from the beginning of rate hiking cycles. The average drawdown during rate hiking cycles is 11.50%. The S&P 500 experienced a nearly 25% drawdown during the current cycle.

rate hikes and drawdowns

There are two other considerations in formulating expectations for what the next Federal Reserve pivot has in store for stocks.

First, the graph below shows the maximum drawdowns during rate-cutting periods and the one-year returns following the final rate cut. From May 2020 to May 2021, the one-year period following the last rate cut, the S&P 500 rose over 50%. Such is three times the 16% average of the prior eight episodes. Therefore, it’s not surprising the maximum drawdown during the current rate hike cycle was larger than average.

rate cuts and drawdowns

Second, valuations help explain why recent drawdowns during Federal Reserve pivots are worse than those before the dot-com bubble crash. The graph below shows the last three rate cuts started when CAPE10 valuations were above the historical average. The prior instances all occurred at below-average valuations.

cape 10 valuations

The current CAPE valuation is not as extended as in late 2021 but is about 50% above average. While the market has already corrected some, the valuation may still return to average or below it, as it did in 2003 and 2009.

It’s tough to draw conclusions about the 2020 drawdown. Unprecedented fiscal and monetary policies played a prominent role in boosting animal spirits and elevating stocks. Given inflation and political discord, we don’t think Fed members or politicians will be likely to gun the fiscal and monetary engines in the event of a more significant market decline.


The Federal Reserve is outspoken about its desire to get inflation to its 2% target. If they were to pivot by as much and as soon as the market predicts, something has broken. Currently, it would take a severe negative turn to the banking crisis or a rapidly deteriorating economy to justify a pivot, the likes of which markets imply. Mind you, something breaking, be it a crisis or recession, does not bode well for corporate earnings and stock prices.

There is one more point worth considering regarding a Federal Reserve pivot. If the Fed cuts Fed Funds, the yield curve will likely un-invert and return to a normal positive slope. Historically yield curve inversions, as we have, are only recession warnings. The un-inversion of yield curves has traditionally signaled that a recession is imminent. 

The graph below shows two well-followed Treasury yield curves. The steepening of both curves, shown in all four cases and other instances before 1990, accompanied a recession.

Over the past two weeks, the two-year- ten-year UST yield curve has steepened by 60 bps!

yield curves rate cuts and recessions

The post A Federal Reserve Pivot is not Bullish appeared first on RIA.

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COVID-19 impacted smoking assessment rates in community health centers, necessitating a closer examination on how procedures can be adapted

COVID-19 Impacted  Smoking Assessment Rates in Community Health Centers, Necessitating a Closer Examination on How Procedures Can be Adapted Credit: Annals…



COVID-19 Impacted  Smoking Assessment Rates in Community Health Centers, Necessitating a Closer Examination on How Procedures Can be Adapted

Credit: Annals of Family Medicine

COVID-19 Impacted  Smoking Assessment Rates in Community Health Centers, Necessitating a Closer Examination on How Procedures Can be Adapted

Researchers from Oregon Health & Science University and OCHIN,  a large nonprofit network of community health centers, extracted electronic health record data from 217 primary care clinics between January 2019 through the end of July 2021, which included telehealth and in-person visits for 759,138 adult patients aged 18 and older years to determine how monthly rates of tobacco assessment had been affected by the COVID-19 pandemic. The team calculated the rates per 1,000 patients. The team found that between March and May 2020, tobacco assessment monthly rates declined from 155.7 per 1,000 patients down to 77.7 per 1,000 patients, a 50% decline. There was a subsequent increase in tobacco assessment between June 2020 and May 2021. However, assessments remained 33.5% lower than pre-pandemic levels. These findings are significant given the fact that tobacco use can increase the severity of COVID-19 symptoms.

What is Known on This Topic: While there is plentiful evidence on the impact that COVID-19 has had on primary health care seeking and delivery, little is known about how the pandemic affected tobacco use assessments and cessation programs.

What This Study Adds: The decline in the rate of tobacco assessments during the onset of the COVID-19 pandemic was substantial and rates have yet to return to pre-pandemic levels. Given that tobacco use can exacerbate COVID-19 symptoms, researchers recommend careful examination of procedural changes to adapt care delivery to support community health centers, specifically tobacco cessation efforts.

.Impact of COVID-19 Pandemic on Assessing Tobacco Status in Community Health Centers

Susan A. Flocke, PhD, et al,
Department of Family Medicine, Oregon Health & Science University, Portland, Oregon
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