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Futures Rebound As Fed-Induced Rout Finally Eases

Futures Rebound As Fed-Induced Rout Finally Eases

After yesterday’s miraculous tech recovery which saw gigacaps drop as much as 4% before recovering all losses and closing green, Nasdaq futures led gains among U.S. stock-index futures, hintin



Futures Rebound As Fed-Induced Rout Finally Eases

After yesterday's miraculous tech recovery which saw gigacaps drop as much as 4% before recovering all losses and closing green, Nasdaq futures led gains among U.S. stock-index futures, hinting at further relief for technology stocks as Treasury yields retreated in early trading but have since steadied around 1.75%, unchanged from Monday. Nasdaq futures rose as much as 0.7%, while S&P 500 and Dow Jones contracts were also higher by about 0.4% ahead of Powell’s Senate confirmation hearing for second term as Fed chair which begins at 10am and where the Fed chair is expected to put on a dovish mask and walk back some of the recent hawkish commentary.

Dip-buyers rescued the Nasdaq from a fifth session of declines on Monday after Marko Kolanovic urged JPM clients to buy the dip, writing that yields aren't too high and the Fed's won't derail the economy’s rebound. “We view the recent equity volatility as an adjustment to the Fed’s incrementally more hawkish stance, rather than a sign that the Fed is about to bring the recovery and the equity rally abruptly to an end,” Mark Haefele, chief investment officer at UBS Global Wealth Management, said in a note. “We now expect three Fed rate hikes this year, starting as soon as March.”

“We are looking for opportunities to raise our weighting in stocks in 2022,” according to Luca Paolini, chief strategist at Pictet Asset Management, whose firm has a neutral stance on equities. “The global recovery remains resilient, thanks to a strong labor market, pent-up demand for services and healthy corporate balance sheets.”  

In his second term confirmation hearing before the Senate Banking Committee at 10am ET today, Fed Chair Jerome Powell will say the central bank will keep inflation from becoming entrenched, but the post-pandemic economy may look different from previous expansions. Meanwhile, swaps indicate the Fed will implement as many as four interest-rate hikes this year, while the momentum is building for the first increase to take place as soon as March, although any economic slowdown will quickly crash these plans.

In U.S. premarket trading, technology stocks including Apple Inc. and Microsoft Corp. rose. Tesla Inc. gained following positive autos sales data from China and a price target hike at Morgan Stanley. Intel Corp. shares jumped after the chipmaker hired Micron Technology Inc.’s David Zinsner as chief financial officer. Here are some of the other big movers today:

  • Mega-cap U.S. technology stocks edged higher in premarket trading, hinting at a return of dip-buyers after last week’s selloff wiped $1.1 trillion from the value of the Nasdaq Composite Index. Tesla (TSLA US), Apple (AAPL US), Microsoft (MSFT US) are among the companies moving higher.
  • Tesla (TSLA US) shares gain 2% in U.S. premarket trading, following positive autos sales data from China and a PT hike at Morgan Stanley. Chinese EV peers also rally.
  • Intel (INTC US) shares gain 2.3% in U.S. premarket trading after the chipmaker hires Micron’s David Zinsner as CFO. Micron shares decline 1%.
  • TechnipFMC (FTI US) falls 6.6% in U.S. premarket trading after Technip Energies bought back 1.8m of its shares from TechnipFMC. TechnipFMC announced plan to delist from Euronext Paris and move to a single U.S. listing.
  • Rivian Automotive (RIVN US) dropped in post- market trading Monday after a Dow Jones report that its chief operating officer left the company last month as it ramped up production. Shares tumbled 5.6% in regular trading to close at a record low.
  • Wynn Resorts (WYNN US) fell in postmarket trading after Citi downgraded the stock to neutral from buy, citing valuation
  • Inari Medical Inc. jumped 10% in postmarket trading after the medical device company posted preliminary 4Q revenue that topped expectations.

Tech shares also led gains in Europe, where equities mostly reversed Monday’s sell off with the Euro Stoxx 50 rising ~1.25%. Technology, travel, consumer products and health-care stocks are among Europe’s top performing sectors Tuesday as investors rotate into sectors beaten down in recent sessions. BE Semi shares gain 4.3%, best performing tech stocks, while food delivery stocks gain on Delivery Hero’s outlook and HelloFresh introducing a new share buyback. Meanwhile banking and auto stocks -- this year’s top performing sectors - are at the bottom of the leaderboard, with banks falling for the first time this year: Deutsche Bank -1.6% and Commerzbank -2.9%, biggest decliners in Europe as Cerberus cuts stakes. Here are some of the biggest European movers today:

  • Technology, travel, consumer products and health-care stocks are among Europe’s top performing sectors Tuesday as investors rotate into sectors beaten down in recent sessions.
  • Delivery Hero +6.2% at noon CET, Sinch +8.6%, BE Semiconductor 7.2%, HelloFresh +4.2%
  • Pandora shares rise as much as 7.5% after publishing preliminary 4Q sales numbers, which Morgan Stanley says provide relief for investors and suggest “solid underlying momentum.”
  • Sika shares climb as much as 5.2%, the steepest intraday gain since November, after the Swiss construction- materials maker reported 4Q sales that beat expectations, Vontobel says.
  • Brunello Cucinelli shares jump as much as 8.4% after the Italian apparel maker reported 4Q sales that showed all channels and geographies accelerating from the previous quarter.
  • Shop Apotheke rise as much as 2.5% after reporting preliminary 4Q numbers. Citi notes sales are driven by “solid 4Q performance,” adding questions remain on e-prescriptions in Germany.
  • Darktrace soared the most since its trading debut after the cybersecurity company boosted its outlook, prompting an upgrade from the broker whose bearish note triggered a plunge last year.
  • JDE Peet’s, Reckitt fall, among the worst performers in Europe’s Stoxx 600 Index, after Exane BNP Paribas downgrades the stocks in a note that says it’s “not too enthused” about the 2022 outlook for consumer staples.
  • Castellum falls as much as its chief executive officer was ousted after only one month at the helm of one of Sweden’s biggest property companies, while DNB also downgraded the shares.
  • About You shares drop as much as 7.4% after the company reported 3Q21 sales below market consensus, in addition to higher-than-expected costs related to marketing and expansion.

Meanwhile, earlier in the session, Asian stocks were poised to halt a two-day gain as investors sold high-growth technology shares amid uncertainty over U.S. monetary policy. The MSCI Asia Pacific Index fell 0.1% after dropping as much as 0.7% as information-technology firms slid, while gains in financial shares helped limit the gauge’s loss. China’s CSI 300 and Japan’s Nikkei 225 Stock Average were among the worst performers in the region. Asia’s benchmark is struggling to pull itself from last year’s 3.4% slump amid lingering concerns over U.S. tightening, China’s weak technology shares and the possibility of new restrictions to contain the pandemic. 

“It’s a bit difficult to aggressively buy up stocks,” said Masahiro Ichikawa, chief market strategist at Sumitomo Mitsui DS Asset Management. “People are wary over the possibility of a faster-than-expected rate hike cycle.”  Still, Pfizer’s remarks suggesting a vaccine for the omicron variant could be available as early as March “will somewhat alleviate concern over the virus,” Ichikawa added. Pfizer is developing a hybrid vaccine that combines its original shot with a formulation that shields against the highly transmissible omicron variant, CEO Albert Bourla said at a conference on Monday.

Japanese equities slid for a third day after the yen strengthened against the dollar and amid continued concerns over virus infections and U.S. monetary tightening. Electronics and chemical makers were the biggest drags on the Topix, which fell 0.4%. Keyence dropped 7.9% as investors sold growth stocks amid uncertainty over the Federal Reserve’s plan, Ichiyoshi Asset Management said.  Tokyo Electron and Fast Retailing were the largest contributors to a 0.9% loss in the Nikkei 225. The yen slightly weakened against the dollar after gaining 0.8% in the previous four sessions. Many now expect the Fed will implement four quarter-point interest-rate hikes this year. Meanwhile, Prime Minister Fumio Kishida said Japan will extend its tightened border measures until the end of February as virus cases surge in the country

India’s benchmark equity index ended higher, after swinging between gains and losses during the day, ahead of quarterly earnings for top companies. The S&P BSE Sensex climbed 0.4% to close at 60,616.89 in Mumbai, while the NSE Nifty 50 Index added 0.3% to complete a third session of gains. Housing Development Finance Corp gave the biggest boost to the Sensex, rising 1.9%. Of the 30 shares in the Sensex, 16 rose and 14 fell. Thirteen of the 19 sector indexes compiled by BSE Ltd. gained, led by a gauge of power stocks.  The S&P BSE Metal Index fell 2.8%, the most in three weeks, after Jefferies India Pvt. put out a cautious view on the metals sector in 2022. The brokerage downgraded Tata Steel Ltd. to hold and JSW Steel to underperform from buy.   Analysts expect a steady growth in sales for the nation’s top software exporters, Tata Consultancy Services, Infosys and Wipro, which are scheduled to release their Oct.-Dec. earnings reports on Wednesday.  “All eyes are on the earnings of the three IT majors. We reiterate our positive yet cautious view on markets and suggest focusing more on sector and stock selection,” Ajit Mishra, vice president research at Religare Broking Ltd. wrote in a note.  India is ramping up its vaccination drive for younger population and booster shots for senior citizens as Covid-19 cases climb.

Australian stocks extended losses as bank, consumer staples weighed. The S&P/ASX 200 index fell 0.8% to close at 7,390.10, down for a second straight day, with banks and consumer staples among sectors weighing most on the benchmark. Ten of the 11 industry sub-gauges closed lower, while materials stocks were little changed. Inghams was among the worst performers, tumbling after the company said the spread of omicron is having a significant impact on its supply chain, operations, logistics and sales performance. Polynovo soared after the company reported U.S. sales were up 58% year on year.  In New Zealand, the S&P/NZX 50 index fell 0.5% to 12,831.73.

In rates, Treasuries were cheaper across front-end of the curve while long-end outperforms with 10-year Treasury yields on either side of 1.75% giving the curve a small bull flattening bias as participants set up for first of this week’s auctions, in the form of a 3-year note sale at 1pm ET.  Treasury yields are cheaper by 2.4bp in 2-year sector, flattening 2s10s spread as 10s are little changed at 1.76%; long-end yields are ~1bp richer on the day, flattening 5s30s spread by ~3bp toward last year’s low. Gilts outperformed by 1.7bp in 10-year sector, bunds by ~0.5bp. The US coupon auction cycle includes $52b 3-year new issue, $36b 10-year reopening Wednesday and $22b 30-year reopening Thursday; the WI 3-year yield at around 1.240% exceeds auction stops since February 2020; last month’s drew 1%, 0.3bp below the WI yield at the bidding deadline. IG dollar issuance slate includes five deals announced overnight; ten borrowers priced $12.2b Monday. Peripheral spreads widen slightly, books on Spain’s 10y syndication top EU58b.

In FX, Bloomberg Dollar Spot returns to flat on the session after a choppy morning, with the Bloomberg Dollar Index drifting with EUR/USD little changed at around $1.33; the 10-year Treasury yield is steady at 1.75%. Commodity currencies lead in G-10, JPY lags, fading roughly half of Monday’s strength: the Norwegian krone outperforms G-10 peers alongside the Canadian dollar as oil snaps a two-day run of declines. The Japanese yen lags, halting a four-day rally as an easing of concern over the omicron outbreak damped demand for haven assets. Australia’s dollar strengthens after retail sales beat forecasts. “The Aussie has received a bit of a boost from the strong retail-sales data, but also some bargain hunting in equities with S&P 500 futures trading a little higher,” said David Forrester, a senior foreign-exchange strategist at Credit Agricole CIB in Hong Kong.

In commodities, crude futures rise over 1%. WTI regains a $79-handle, pushing through Monday’s highs. Brent rises through $82. Spot gold adds ~$4 but struggles to make headway through $1,810/oz. Base metals are in the green after a prolonged exchange outage, with LME nickel up over 3%.

Looking at the day ahead, the main highlight will be Fed Chair Powell’s nomination hearing for a second term at the Senate Banking Committee. We’ll also hear from the Fed’s Mester, George and Bullard, along with the ECB’s Kazaks. Data releases include Italian retail sales for November, and in the US there’s the NFIB small business optimism index for December.

Market Snapshot

  • S&P 500 futures up 0.4% to 4,681.75
  • STOXX Europe 600 up 1.1% to 484.28
  • MXAP little changed at 193.02
  • MXAPJ up 0.2% to 630.48
  • Nikkei down 0.9% to 28,222.48
  • Topix down 0.4% to 1,986.82
  • Hang Seng Index little changed at 23,739.06
  • Shanghai Composite down 0.7% to 3,567.44
  • Sensex up 0.3% to 60,584.58
  • Australia S&P/ASX 200 down 0.8% to 7,390.12
  • Kospi little changed at 2,927.38
  • Brent Futures up 1.5% to $82.08/bbl
  • Gold spot up 0.4% to $1,809.09
  • U.S. Dollar Index down 0.17% to 95.83
  • German 10Y yield little changed at -0.06%
  • Euro up 0.1% to $1.1342

Top Overnight News from Bloomberg

  • Federal Reserve Chair Jerome Powell said the central bank will prevent higher inflation from becoming entrenched while cautioning that the post-pandemic economy might look different than the previous expansion
  • Asian stocks and U.S. futures fluctuated Tuesday ahead of a key American inflation reading that’s expected to strengthen the case for tighter monetary policy
  • Boris Johnson is facing opposition calls for his resignation over an alleged drinks party in his Downing Street office while pandemic curbs were in place, renewing a sense of crisis around the U.K. premier
  • President Kassym-Jomart Tokayev said Russian-led troops that helped him crush an uprising would begin to leave in two days as he denounced “oligarchic groups” that dominate Kazakhstan’s economy

A more detailed look at global markets courtesy of Newsquawk

Asian equities were subdued following on from the mostly negative lead from Wall St where stocks declined at the open, but then finished off their lows and the Nasdaq fully recovered from a near-3% drop as yields wavered. ASX 200 (-0.8%) was pressured with the index dragged lower by underperformance in the top-weighted financials and consumer staples sectors amid expectations that the ongoing Omicron wave is to slow the economic recovery, with better-than-expected Retail Sales data doing little to lift sentiment. Nikkei 225 (-0.9%) underperformed on return from the holiday closure amid confirmation that border restrictions will be extended until end-February and after some prefectures recently entered into COVID-19 pre-emergency status, while KOSPI (+0.1%) was also cautious following a second suspected ballistic missile launch by North Korea in less than a week. Hang Seng (Unch.) and Shanghai Comp. (-0.7%) were choppy with price action rangebound amid a neutral PBoC liquidity operation and after China’s Cabinet reiterated to refrain from flood-like stimulus but will expand financial consumption. Furthermore, COVID-19 concerns persisted with Tianjin imposing a partial lockdown and Hong Kong suspending in-person kindergarten and primary school lessons, although Hong Kong Chief Executive Carrie Lam also announced to launch a new anti-epidemic relief fund. Finally, 10yr JGBs were initially flat as the risk averse mood in Tokyo stocks and presence of the BoJ in the market for over JPY 1tln of JGBs failed to spur demand, while prices were later pressured on return from the lunch break in a retreat beneath the 151.00 level.

Top Asian News

  • Asia Stocks Set to Snap 2-Day Gain as Fed Outlook Hits Tech
  • Japan’s Household Inflation Expectations Jump to Most Since 2008
  • Mizuho Set to Appoint New CEO as Technical Glitches Persist
  • Shimao Downgraded to B- by Fitch on Liquidity Concerns

European equities (Stoxx 600 +1.0%) are attempting to claw back some of yesterday’s losses and catch up with the late rally seen on Wall St. yesterday. Fresh fundamental/macro drivers for the region are lacking, however, from a technical standpoint, the Stoxx 600 (currently 484) still has some ground to cover before it reaches yesterday’s opening level of 487.58 and last week’s record high (4th Jan) at 495.46. The handover from the APAC region was a downbeat one as Japanese participants returned to the fray (Nikkei 225 -0.9%), with the ASX 200 (-0.8%) hampered by losses in financial and consumer discretionary names, whilst Chinese bourses (Hang Seng flat, Shanghai Comp. -0.7%) were subdued by ongoing COVID angst and further reiterations from China’s cabinet that it will avoid flood-like stimulus. Stateside, US futures have picked up throughout the European session with gains of a similar magnitude across the majors (ES +0.4%, NQ +0.4%, RTY +0.4%). Focus for the US will fall on Fed Chair Powell’s renomination hearing at the Senate Banking Committee which will see the policymaker grilled on how he is going to attempt to combat the current inflationary pressures in the US economy. In terms of desk views, analysts at BNP Paribas suggest that European equities could stage a rally over the coming months amid bearish positioning and attractive valuations. BNP forecasts the Eurostoxx 50 gaining 10% to 4,700 by the end of June before drifting lower to 4,500 by the end of the year. Preferred sectors include miners, oil & gas, banks, autos and healthcare. Sectors in Europe are mostly firmer with tech top of the pile in the wake of the rally staged after the European close in the Nasdaq. Retail names are also on a firmer footing with Kering (+3.4%) top of the CAC after RBC named the Co. among its preferred stocks in the region and cited it as a “more likely candidate for M&A”. RBC also listed Adidas (+4.1%), Puma (+2.3%), Richemont (+2.1%) and LVMH (+1.5%) as “outperform rated stocks” under its “Key Stock Ideas for 2022”. The travel & leisure sector has been lifted by performance in Flutter Entertainment (+4.1%) and Evolution Gaming (+4.9%) after both companies were upgraded at Citi. Performance in banking names has been subdued by losses in Deutsche Bank (-1.5%) and Commerzbank (-3.3%) after Cerberus sold around 21mln and 25.3mln of shares in both companies respectively.

Top European News

  • Boris Johnson Urged to Quit Over Latest Pandemic Party Claim
  • Putin’s Troops Prepare to Exit as Kazakh Leader Blasts Oligarchs
  • Spain Calls for Debate to Consider Covid as Endemic, Like Flu
  • Cerberus Scales Back Losing Deutsche Bank, Commerzbank Bet

In FX, the Dollar has lost more of Monday’s recovery momentum as US Treasuries rebound from their fresh lows, risk appetite improves and some technical or psychological levels push the Buck back down towards recent lows. Using the index as a proxy, 96.000 is now capping the upside and support is seen at yesterday’s low (96.754) ahead of last Friday’s base (95.710) and the prior weekly trough (96.653) as the DXY drifts within a 95.947-765 band awaiting tomorrow’s CPI data that could well be pivotal, if not Fed commentary later today via George and chair Powell at this renomination testimony. Note, however, a prepared text for the latter has already been released so it will be the Q&A section of the Senate Banking Committee hearing that will likely be more informative/insightful.

  • GBP/CHF/EUR/AUD/CAD/NZD - It has turned into a relatively tight race to reap the most from the Greenback’s retreat and top the G10 ranks as Sterling tests major trendline resistance seen around 1.3610-15 to post highs not seen since late 2021, while Eur/Gbp continues to hammer on the door aligning with 1.2000 in Euros per Pound, but looks thwarted indirectly by activity designed at curbing Franc strength via various Eur crosses. Indeed, the Franc is back above 0.9250, but well off best levels against the Euro as the pair pivots 1.0500 where 1.44 bn or so option expiries roll off. Eur/Usd is eyeing 1.1350 again, partly as a result, while the Aussie is approaching 0.7200 with impetus from much stronger than expected final retail sales and internals within a narrower than forecast trade surplus, the Loonie is latching on to a firm bounce in WTI either side of 1.2650 and the Kiwi is hovering above 0.6750 with tailwinds from Aud/Nzd easing back towards 1.0600.
  • JPY - The Yen looks somewhat caught between stalls following Japan’s long holiday weekend as the risk backdrop is negative for the safe-haven currency, but yields are more supportive along with the technical landscape assuming Usd/Jpy remains below a Fib retracement level at 115.45. From a fundamental perspective, the domestic COVID situation has worsened and data looms in the guise of current accounts and trade balances.
  • SCANDI/EM - Brent’s revival to circa Usd 82/brl or just above at best is keeping the Nok underpinned after yesterday’s strong Norwegian inflation readings, while the Zar is elevated alongside Gold that is holding comfortably on the Usd 1800/oz handle and over the 200 DMA. Conversely, the Rub appears to be cautious amidst reports from the Russian side that grounds for optimism from talks with the US are few and far between, while the Try has hardly been helped a slightly wider than consensus Turkish current account deficit or the higher price of crude oil.

In commodities, crude prices mounted a recovery in APAC hours that has continued into and exacerbated during the European session taking WTI modestly past yesterday’s peak of USD 79.45/bbl and Brent to almost match its equivalent at USD 82.30/bbl. Fundamentals remain focused on USD/inflation implications, Fed Chair Powell – among other speakers – will be eyed closely for further insight into this; elsewhere, we remain attentive to supply updates and geopolitics. On the supply side, following yesterday’s reports that Libya’s El Sharara has resumed production at 998k BPD the El Feel field (90k BPD) is also reported to be back in action. However, since then the NOC has suspended exports from the Es Sider port, due to bad weather and a lack of storage; typically, loading 300k BPD of crude. While the duration and knock on impact of this suspension is unclear, it is worth noting the NOC says domestic oil output stands at 896k BPD – a figure that is below the resumed output of the El Sharara field. Separately, Reuters sources report that Saudi Aramco has informed multiple APAC purchasers that it will be supplying the entirety of its contractual volumes in February, following Aramco cutting February OSPs to the region to a three-month low in recent sessions. On geopolitics, the morning's press rounds from the Russian Foreign Ministry have not been particularly constructive after the first day of discussions, but nonetheless they to acknowledge that there are many more rounds to go – since then, sources via Ria indicate that the US has agreed to respond in writing to security proposals from Russia next week. Turning to metals, spot gold and silver are contained with the yellow metal continuing to pivot the USD 1800/oz mark and therefore remains in reach of the 21-, 50 & 200-DMAs. Base metals are more inspiring though LME copper lies in familiar parameters and directionally is in-tune with the broader risk tone.

US Event Calendar

  • 6am: Dec. SMALL BUSINESS OPTIMISM, est. 98.7, prior 98.4

Central Banks

  • 9:12am: Fed’s Mester speaks on Bloomberg Television
  • 9:30am: Fed’s George Discusses the Economic and Policy Outlook
  • 10am: Senate Banking Cmte Holds Hearing on Powell Nomination
  • 4pm: POSTPONED - Fed’s Bullard Discusses Economy and Monetary...

DB's Jim Reid concludes the overnight wrap

We managed to throw a wrench (albeit a small one) into the 2022 script late in the New York session last night. After an early sharp yield selloff continued to put pressure on tech stocks, 10yr yields finished the day ever-so-slightly lower for the first time in 2022, declining -0.2bps, ending a run of 7 straight increases. Despite the late rally, yesterday was the first time since January 2020 that 10yr yields had at one point traded above the 1.8% mark and markets acknowledged the prospects of multiple rate hikes this year. We’ll likely get some more headlines on monetary policy today, given Fed Chair Powell’s nomination hearing for a second term is taking place before the Senate Banking Committee, but ahead of that Fed funds futures were last night pricing in an 89% chance of an initial rate hike as soon as March, the highest probability to date and up from 63% just 10 days’ earlier on New Year’s Eve and 0% in the first half of October.

Looking elsewhere on the Treasury curve, tighter anticipated policy helped yields trade at post-pandemic highs on the shorter part of the curve, with 2yr and 5yr yields both hitting their highest levels in almost 2 years. And in keeping with the déjà vu theme of the year so far, it won’t surprise you to find out that real yields were once again the driver behind higher nominal yields, with the 5yr real yield up +1.9bps, while 10yr real yields hit -0.72% intraday, the highest level since April before falling back to -0.77% as the turnaround occurred. Meanwhile in Europe the 10yr bund yield (+0.9bps) ended the session (before the late US bond rally) at -0.038%, as it kept edging closer to positive territory for the first time since May 2019.

The late rally in longer-term yields was an immediate boon to equities. The S&P 500 finished the day down -0.15%, after being more than -2.0% lower intraday. The reversal in equity fortunes clearly hinged on the tech sector performance; the Nasdaq finished +0.05% higher, basically unchanged, after being -2.78% lower intraday, which was more than -10% off the all-time highs. In line, the Vix index of volatility rose to a year-to-date high of 23.33pts intraday, before retracing and finishing a mere +0.64pts higher at 19.4pts.

As has been the case on a number of days to start the year, the European equity session missed the intraday turn that happened during New York trading. The STOXX 600 (-1.48%) experienced its worst daily performance since the initial Omicron selloff in November. As with last week, banks were relatively well-insulated from the broader selloff in light of the higher yields, with the STOXX Banks only down -0.28%, but tech stocks bore the brunt of the decline in Europe, with the STOXX Technology index shedding -3.97%. The losses yesterday for the DAX (-1.13%) and the CAC 40 (-1.44%) meant that both moved into negative territory on a YTD basis as well, though the FTSE 100 (-0.53%) has been more resilient, and is still up +0.82% since the start of the year, making it one of the top-performing major indices in the US and Europe.

Asian markets are struggling to find direction this morning. The Nikkei (-0.93%) is trading significantly lower after yesterday's holiday while the Shanghai Composite (-0.08%), CSI (-0.29%), Kospi (-0.06%) are slightly lower. Elsewhere, the Hang Seng (+0.29%) is modestly higher. In Covid news, China locked down its central Henan province as the city has registered the most covid cases nationwide. Elsewhere, in Japan, Prime Minister Fumio Kishida announced that the nation will extend its strict border restrictions until late February to prevent the spread of the Omicron variant. Looking forward, US equity futures are flattish with the S&P (-0.04%), Nasdaq (-0.06%) and Dow Jones (-0.07%) hardly moving. Treasury yields are also flat after yesterday’s turnaround. China's consumer and producer prices data tomorrow is the next big Asian highlight.

A separate ongoing story this week will be the various talks between the US, Russia and allies over Russia’s various security demands, including that Ukraine would not be allowed to join NATO, and a Russian veto over military deployments in nearby states. Yesterday, the US and Russian deputy foreign ministers held discussions in Geneva, which come ahead of broader talks at a meeting of the NATO-Russia Council tomorrow. The readouts from yesterday’s bilateral talks proved constructive. The senior American diplomat leading the talks noted that the US and Russia have a better understanding of each other’s concerns and priorities following the conversation, and added that “If Russia stays at the table and takes concrete steps to deescalate tensions, we believe we can achieve progress.” At the same time, she noted the US stood ready to impose sanctions, among other measures, if need be. So this week’s ongoing negotiations will be important for the current flashpoint along the Ukrainian border.

Elsewhere, the broader risk-off moves meant that at one point Bitcoin was trading beneath $40,000 for the first time since September, although it pared back some of those losses to only close down -1.38%. It’s been a bad start to the year for the cryptocurrency, having shed around -10% over the first 10 days of the year.

In Fed leadership composition news, Vice Chair Clarida announced his resignation would be effective at the end of this week. It was scheduled for the end of the month so the practical implications are essentially nil. There were more headlines that President Biden was set to nominate new personnel to Fed leadership positions shortly, though headlines of that ilk have been commonplace for a few months now. Perhaps with Vice Chair Clarida stepping aside, there’s more urgency behind appointments, we will see.

There were headlines from Moderna and Pfizer that development of Omicron-specific vaccines were proceeding along. While Moderna is set to begin human trials in a few weeks, Pfizer reported they should be able to launch a hybrid vaccine that offers Omicron-specific protection by March. Given the rate it has spread across the world we may have all been exposed by then!

There wasn’t much at all in the way of data yesterday, though the Euro Area unemployment rate fell to 7.2% in November as expected, its lowest level since March 2020, and the Italian unemployment rate fell to 9.2% that month (vs. 9.3% expected).

To the day ahead now, and the main highlight will probably be Fed Chair Powell’s nomination hearing for a second term at the Senate Banking Committee. We’ll also hear from the Fed’s Mester, George and Bullard, along with the ECB’s Kazaks. Data releases include Italian retail sales for November, and in the US there’s the NFIB small business optimism index for December.

Tyler Durden Tue, 01/11/2022 - 08:07

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Where Are Interest Rates Headed? Is The Fed Correct Or The Eurodollar Curve?

Where Are Interest Rates Headed? Is The Fed Correct Or The Eurodollar Curve?

Authored by Mike Shedlock via,

The Eurodollar curve…



Where Are Interest Rates Headed? Is The Fed Correct Or The Eurodollar Curve?

Authored by Mike Shedlock via,

The Eurodollar curve implies four quarter-point cuts are on the way starting in 2023. The Fed believes otherwise. Let's discuss stock market implications.

Data from CME and Fed via Wall Street Journal.

Eurodollar Curve

The eurodollar curve has nothing to do with euros or dollars. Rather it is an interest rate curve and one of the world's most widely traded futures.

After peaking at about 3.9% this year, eurodollar betters believe the Fed will then cut rates all the way down to 2.8%. 

Five Not-Quite-Impossible Things the Market Believes

Wall Street Journal Contributor James Macintosh discussed the above chart in Five Not-Quite-Impossible Things the Market Believes

  1. Inflation is transitory. 

  2. The Fed realizes this in time.

  3. The jobs market cools enough to slow wage rises. 

  4. But not so much it means falling household spending.

  5. So consumer spending rises in real terms. 

In reference to the led chart, Macintosh says "The first assumption is the hardest to believe."

I disagree. The hardest thing to believe is the overall goldilocks scenario and that the current rally makes any sense at all. 

Inflation may easily come down if the Fed tightens too much too fast causing a severe recession. What would that do to corporate profits? 

But assume otherwise, that inflation does not come down more. What would that do to corporate profits? 

While any of the first three points may easily be correct, the combination of all five being correct and that stocks will rise in a goldilocks scenario is what I find hard to believe.

Is the Market Forward Looking?

Goldilocks proponents will tell you that the market is forward looking. 

The market isn't forward looking and never was. It is a coincident indicator of current sentiment, wildly wrong at major turns.

If the market was forward looking, what precisely was it looking forward to at the November 2007 peak with recession starting the next month? 

What was it looking forward to at the 1929 peak, the 1933 bottom, the 2009 bottom or any other top or bottom?

The Fed Will Hike Until It Breaks Something

I believe the eurodollar curve is more likely to be correct than the Fed. When has the Fed gotten much of anything correct?

The eurodollar view has two ways to win. The first is the Fed actually does tame inflation to the degree that it wants.

That's possible in a severe enough recession. And the global picture is easily weak enough for that to happen.

The second way the eurodollar curve might be correct is if the Fed breaks the credit market. 

The Fed would immediately reverse course, regardless of inflation, should that happen. 

Neither a credit event nor strong recession would be good for the stock market.

The least likely thing is that the Fed achieves a goldilocks soft landing. Yet, assume that happens. 

Macintosh says, and I agree, "The bull case that stocks and corporate bonds are pricing requires the combination of low joblessness and wage rises to allow spending to rise faster than inflation even after pandemic savings run out. But not so much faster that it hits capacity constraints and accelerates inflation."

The problem with goldilocks is stocks are priced so much beyond perfection that they may decline anyway. 

Globally Speaking 

  1. China Does Surprise Rate Cut to Help Its Economy, But It Won't Work

  2. German Costs to Ship by Barge are up Twenty Times and May Soon Be Impossible

  3. UK Average Electricity Cost Will Soar to $5,370 Per Year By 2023

  4. US Industries Are Buckling Under Pressure of Surging Electricity Costs

Good luck with goldilocks, especially with the Fed still hiking. 

*  *  *

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Tyler Durden Wed, 08/17/2022 - 09:45

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Futures Tumble After UK Double-Digit Inflation Shock Sparks Surge In Yields

Futures Tumble After UK Double-Digit Inflation Shock Sparks Surge In Yields

Futures were grinding gingerly higher, perhaps celebrating the…



Futures Tumble After UK Double-Digit Inflation Shock Sparks Surge In Yields

Futures were grinding gingerly higher, perhaps celebrating the end of the Cheney family's presence in Congress, and looked set to re-test Michael Hartnett bearish target of 4,328 on the S&P (which marked the peak of yesterday's meltup before a waterfall slide lower when spoos got to within half a point of the bogey), when algos and the few remaining carbon-based traders got a stark reminder that central banks will keep hammering risk assets after the UK reported a blistering CPI print, which at a double digit 10.1% was not only higher than the highest forecast, but was the highest in 40 years.

The print appeared to shock markets out of their month-long levitating complacency, and yields - both in the UK and the US - spiked...

... and with yields surging, futures had no choice but to notice and after trading at session highs just before the UK CPI print, they have since tumbled more than 40 points and were last down 0.85% or 37 points to 4,271.

Nasdaq 100 futures retreated 0.9% signaling a selloff in technology names will continue. The dollar rose as investors awaited the minutes of the Fed’s last policy meeting for clues on policy makers’ sensitivity to weaker economic data.

In US premarket trading, retail giant Target slumped 4% after reporting earnings that missed expectations despite still predicting a rebound. Applied Materials and PayPal dropped at least 1.3%. Tech stocks are the forefront of the growing pessimism over equity valuations on the back of Fed rate increases. The S&P 500 had posted a small gain on Tuesday, aided by earnings reports from retailers Walmart Inc. and Home Depot. Here are some of the other biggest U.S. movers today:

  • Manchester United (MANU US) rises as much as 17% in US premarket trading before trimming most of the gains, after Tesla CEO Elon Musk said he was buying the English football club but later added that he was joking.
  • Hill International (HIL US) shares rise 61% in premarket trading hours after it announced Global Infrastructure Solutions will commence an all-cash tender offer for $2.85/share in cash, representing a premium of 63% to the last closing price.
  • BioNTech (BNTX US) was initiated with a market perform recommendation at Cowen, which expects demand for Covid-19 vaccines to mirror annual flu trends as the pandemic enters its endemic phase.
  • Bed Bath & Beyond (BBBY US) shares surge 20% in premarket trading, putting the stock on track for its sixth day of gains. The home-goods company has helped reinvigorate a wave of meme stock buying
  • Agilent (A US) saw its price target boosted at brokers as analysts say the scientific testing equipment maker’s results were strong thanks to growth in biopharma and a recovery in China, while the company’s guidance was on the conservative side. Shares rose .
  • Jefferies initiated coverage of Waldencast Plc (WALD US) class A with a buy recommendation as analyst Stephanie Wissink sees 29% upside potential.
  • Sea Ltd. (SE US) ADRs slipped as much as 2.1% in US premarket trading, extending Tuesday’s declines, as Morgan Stanley cut its PT on expectations of slowing growth at the Shopee owner’s e-commerce business in the third quarter.
  • Weber (WEBR US) downgraded to sell from neutral at Citi, which says there are too many concerns to remain on the sidelines, including a decline in point-of-sale traffic and macro factors like inflation weighing on consumer demand

In the past two months, US stocks rallied on signs of peaking inflation and an earnings-reporting season that saw four out of five companies meeting or beating estimates. Boosted by relentless systematic (CTA) buying and retail-driven short squeezes, as well as a surge in buybacks, stocks recovered more than 50% of the bear market retracement. Yet, continuing rate hikes and the likelihood of a recession in the world’s largest economy are weighing on sentiment. Meanwhile, concern is growing that Fed rate setters will remain focused on the fight against inflation rather than supporting growth.

“We expect the FOMC minutes to have a hawkish tilt,” Carol Kong, strategist at Commonwealth Bank of Australia Ltd., wrote in a note. “We would not be surprised if the minutes show the FOMC considered a 100 basis-point increase in July.”

In Europe, the Stoxx 600 fell after a strong start amid signs the continent’s energy crisis is worsening. Benchmark natural-gas futures jumped as much as 5.1% on expectations the hot weather will boost demand for cooling. In the UK, consumer-price growth jumped to 10.1%, sending gilts tumbling. Real estate, retailers and miners are the worst performing sectors. The Stoxx 600 Real Estate Index declined 2%, making it the worst-performing sector in the wider European market, as focus turned to UK inflation that soared to double digits for the first time in four decades and also to today's FOMC minutes. German and Swedish names almost exclusively account for the 10 biggest decliners. TAG Immobilien drops 5.4%, Wallenstam is down 4.7%, Castellum falls 4% and LEG Immobilien declines 3.3%. The sector tumbles on rising bond yields, with 10y Bund yield up 11bps, and dwindling demand for Swedish real estate amid rising rates.

Earlier on Wednesday, stocks rose in Asia amid speculation that China may deploy more stimulus to shore up its ailing economy while Japanese exporters were boosted by a weaker yen. After a string of weak data driven by a property-sector slump and Covid curbs, China’s Premier Li Keqiang asked local officials from six key provinces that account for 40% of the economy to bolster pro-growth measures. The MSCI Asia Pacific Index advanced as much as 0.8%, with consumer-discretionary and industrial stocks such as Japanese automakers Toyota and Honda among the leaders on Wednesday. The benchmark Topix erased its year-to-date loss. Chinese food-delivery platform Meituan also rebounded after dropping more than 9% in the previous session on a Reuters report that Tencent may divest its stake in the firm. Chinese stocks erased declines early in the day, as investors hoped for more economic stimulus after a surprise rate cut on Monday failed to excite the market. Premier Li Keqiang has asked local officials from six key provinces that account for about 40% of the country’s economy to bolster pro-growth measures.

“I believe policymakers have the tools to prevent a hard landing if needed,” Kristina Hooper, chief global market strategist at Invesco, said in a note. “I find investors are overly pessimistic about Chinese stocks -- which means there is the potential for positive surprise.” Asia’s stock benchmark is trading at mid-June levels as traders attempt to determine the trajectory of interest-rate hikes and economic growth globally -- as well as the impact of China’s property crisis and Covid policies. Meanwhile, minutes of the US Federal Reserve’s July policy meeting, out later Wednesday, will be carefully parsed. New Zealand stocks closed little changed as the country’s central bank raised interest rates by a half percentage point for a fourth-straight meeting. Australia's S&P/ASX 200 index rose 0.3% to close at 7,127.70, supported by materials and consumer discretionary stocks. South Korea’s benchmark missed out on the rally across Asian equities, as losses by large-cap exporters weighed on the measure

In FX, the Bloomberg Dollar Spot Index rose as the dollar gained versus most of its Group-of-10 peers. The pound was the best G-10 performer while gilts slumped, led by the short end and sending 2-year yields to their highest level since 2008, after UK inflation accelerated more than expected in July. The yield curve inverted the most since the financial crisis as traders ratcheted up bets on BOE rate hikes in money markets, wagering on 200 more basis points of hikes by May. The euro traded in a narrow range against the dollar while the region’s bonds slumped, led by the front end. Scandinavian currencies recovered some early European session losses while the aussie, kiwi and yen extended their slide in thin trading. EUR/NOK one-day volatility touched a 15.12% high before paring ahead of Norges Bank’s meeting Thursday where it may have to raise rates by a bigger margin than indicated in June given Norway’s inflation exceeded forecasts for a fourth straight month, hitting a new 34-year high. Consumer sentiment in Norway fell to the lowest level since data began in 1992, according to Finance Norway. New Zealand’s dollar and bond yields both rose in response to the Reserve Bank hiking rates by 50bps, while flagging concern about labor market pressures and consequent wage inflation; the currency subsequently gave up gains in early European trading. The Aussie slumped after data showing the nation’s wages advanced at less than half the pace of inflation in the three months through June, backing the Reserve Bank’s move to give itself more flexibility on interest rates.

In rates, treasuries held losses incurred during European morning as gilt yields climbed after UK inflation rose more than forecast. US 10-year around 2.87% is 6.5bp cheaper on the day vs ~13bp for UK 10-year; UK curve aggressively bear-flattened following inflation data, with long-end yields rising about 10bp. Front-end UK yields remain cheaper by ~20bp, off session highs, leading a global government bond selloff. US yields are higher on the day by by 4bp-7bp; focal points of US session are 20-year bond auction and FOMC minutes release an hour later. Treasury auctions resume with $15b 20-year bond sale at 1pm ET; WI 20-year yield at around 3.35% is ~7bp richer than July’s sale, which stopped 2.7bp through the WI level.

In commodities, oil fluctuated between gains and losses, and was in sight of a more than six-month low -- reflecting lingering worries about a tough economic outlook amid high inflation and tightening monetary policy.  Spot gold is little changed at $1,774/oz

Looking at the day ahead, the FOMC minutes from July will be the main highlight, and the other central bank speaker will be Fed Governor Bowman. Otherwise, earnings releases include Target, Lowe’s and Cisco Systems, and data releases include US retail sales and UK CPI for July.

Market Snapshot

  • S&P 500 futures down 0.3% to 4,293.00
  • STOXX Europe 600 little changed at 443.30
  • MXAP up 0.5% to 163.48
  • MXAPJ up 0.2% to 530.38
  • Nikkei up 1.2% to 29,222.77
  • Topix up 1.3% to 2,006.99
  • Hang Seng Index up 0.5% to 19,922.45
  • Shanghai Composite up 0.4% to 3,292.53
  • Sensex up 0.5% to 60,168.83
  • Australia S&P/ASX 200 up 0.3% to 7,127.68
  • Kospi down 0.7% to 2,516.47
  • German 10Y yield little changed at 1.06%
  • Euro little changed at $1.0178
  • Gold spot down 0.0% to $1,775.21
  • U.S. Dollar Index little changed at 106.50

Top Overnight News from Bloomberg

  • More market prognosticators are alighting on the idea of benchmark Treasury yields sliding to 2% if the US succumbs to a recession. That’s an out-of-consensus call, compared with Bloomberg estimates of about a 3% level by the end of this year and similar levels through 2023. But it’s a sign of how growth worries are forcing a rethink in some quarters
  • The euro-area economy grew slightly less than initially estimated in the second quarter as signs continue to emerge that momentum is unraveling. Output rose 0.6% from the previous three months between April and June, compared with a preliminary reading of 0.7%, Eurostat said Wednesday
  • Egypt became a prime destination for hot money by tethering its currency and boasting the world’s highest interest rates when adjusted for inflation
  • Norway’s $1.3 trillion sovereign wealth fund, the world’s largest, posted its biggest loss since the pandemic as rate hikes, surging inflation and Russia’s invasion of Ukraine spurred volatility. It lost an equivalent of $174 billion in the six months through June, or 14.4%

A more detailed look at global markets courtesy of Newsquawk

Asia-Pac stocks just about shrugged off the choppy lead from the US where markets were tentative amid mixed data signals and strong retailer earnings, but with gains capped overnight ahead of the FOMC Minutes and as participants digested another 50bps rate hike by the RBNZ. ASX 200 swung between gains and losses with the index indecisive amid a slew of earnings and with strength in the consumer sectors offset by underperformance in tech, energy and healthcare. Nikkei 225 climbed above the 29,000 level with the index unfazed by mixed data releases in which Machinery Orders disappointed although both Exports and Imports topped forecasts. Hang Seng and Shanghai Comp were somewhat varied with Hong Kong led higher by tech amid plenty of attention on Meituan after reports its largest shareholder Tencent could reduce all or the bulk of its shares in the Co. which a Tencent executive later refuted, while the mainland was less decisive amid headwinds from the ongoing COVID situation and with power restrictions disrupting activity in Sichuan, although reports also noted that Chinese Premier Li told top provincial officials that they must have a sense of urgency to consolidate the economic recovery and reiterated to step up macro policies.

Top Asian News

  • RBNZ hiked the OCR by 50bps to 3.00%, as expected, while it stated that conditions need to continue to tighten and they agreed that maintaining the current pace of tightening remains the best means. RBNZ also agreed that further increases in the OCR were required to meet the remit objective and that domestic inflationary pressures had increased since May. Furthermore, the RBNZ raised its projections for the OCR and inflation with the OCR seen at 3.69% in Dec. 2022 (prev. 3.41%) and at 4.1% for both Sept. 2023 and Dec. 2023 (prev. 3.95%), while it sees annual CPI at 4.1% by Sept. 2023 (prev. 3.0%).
  • RBNZ Governor Orr stated at the press conference that they are not forecasting a recession but expected below-potential growth amid subdued consumer spending. Governor Orr also stated that they did not discuss a 75bps rate hike today and that 50bps moves have been orderly and sufficient, while he added that getting rates to 4% would buy comfort for the policy committee and that a Cash Rate of around 4% is unambiguously above neutral and sufficient to meet the inflation mandate.
  • Chongqing, China is to curb power use for eight days for industry.
  • China’s Infrastructure Boom Gets Swamped by Property Woes
  • Tencent 2Q Revenue Misses Estimates
  • Hong Kong Denies Democracy Advocates Security Law Jury Trial
  • UN Expert Says Xinjiang Forced Labor Claims ‘Reasonable’
  • Singapore’s COE Category B Bidding Hits New Record
  • Delayed Deals Add to Floundering Singapore IPO Market: ECM Watch

European bourses have dipped from initial mixed/flat performance and are modestly into negative territory, Euro Stoxx 50 -0.5%. Stateside, futures are under similar pressure awaiting fresh corporate updates and the July FOMC Minutes, ES -0.6%. Fresh drivers relatively limited throughout the session with known themes in play and focus on upcoming risk events; stocks also suffering on further hawkish yield action. Lowe's Companies Inc (LOW) Q1 2023 (USD): EPS 4.68 (exp. 4.58), Revenue 27.47 (exp. 28.12bln); expect FY22 total & comp. sales at bottom-end of outlook range, Operating Income and Diluted EPS at top-end. Target Corp (TGT) Q1 2023 (USD): EPS 0.39 (exp. 0.72), Revenue 26.0bln (exp. 26.04bln); current trends support prior guidance.

Top European News

  • German Gas to Last Less Than 3 Months if Russia Cuts Supply
  • European Gas Surges Again as Higher Demand Compounds Supply Pain
  • Entain Falls; Citi Views Fine Negatively but Notes Steps by Firm
  • UK Inflation Hits Double Digits for the First Time in 40 Years
  • Receives Registration as UK Cryptoasset Provider


  • Greenback underpinned ahead of US retail sales data and FOMC minutes, DXY holds tight around 106.500.
  • Pound pegged back after spike in wake of stronger than expected UK inflation metrics, Cable hovers circa 1.2100 after fade into 1.2150.
  • Kiwi retreats following knee jerk rise on the back of hawkish RBNZ hike, NZD/USD near 0.6300 from 0.6380+ overnight peak.
  • Aussie undermined by marginally softer than anticipated wage prices and lower RBA tightening bets in response, AUD/USD well under 0.7000 vs 0.7026 at one stage.
  • Yen weaker as yield differentials widen again, but Euro cushioned by more pronounced EGB reversal vs USTs, USD/JPY probes 21 DMA just below 135.00, EUR/USD bounces from around 1.0150 towards 1.0200.
  • Loonie and Nokkie soft amidst latest slippage in oil, USD/CAD closer to 1.2900 than 1.2800, EUR/NOK nudging 9.8600 within 9.8215-9.8740 range.

Fixed Income

  • Debt retracement ongoing and gathering pace ahead of Wednesday's key risk events.
  • Bunds now closer to 154.00 than 156.00 and 157.00 only yesterday, Gilts not far from 114.50 vs almost 116.00 and 117.00+ earlier this week and T-note sub-119-00 vs 119-31 at best on Monday.
  • Sonia strip hit hardest as markets price in aggressive BoE hikes in response to UK inflation data toppy already elevated expectations.


  • Crude benchmarks are currently little changed overall, having recovered from a bout of initial pressure; newsflow thin awaiting fresh JCPOA developments
  • Spot gold is little changed overall but with a slight negative bias as the USD remains resilient and outpaces the yellow metal as the haven of choice.
  • Aluminium is the clear outperformer amid updates from Norsk Hydro that they are shutting production at their Slovalco site (175k/T year) by end-September, due to elevated energy prices.
  • OPEC Sec Gen says he sees a likelihood of an oil-supply squeeze this year, open for dialogue with the US. Still bullish on oil demand for 2022. Too soon to call the outcome of the September 5th gathering. Spare capacity at around the 2-3mln BPD mark, "running on thin ice".
  • US Private Inventory Data (bbls): Crude -0.4mln (exp. -0.3mln), Cushing +0.3mln, Gasoline -4.5mln (exp. -1.1mln), Distillates -0.8mln (exp. +0.4mln).
  • Shell (SHEL LN) announced it is to shut its Gulf of Mexico Odyssey and Delta crude pipelines for two weeks in September for maintenance, according to Reuters.
  • Uniper (UN01 GY) says the energy supply situation in Europe is far from easing and gas supply in winter remains "extremely challenging".
  • China sets the second batch of the 2022 rare earth mining output quota at 109.2k/T, via Industry Ministry; smelting/separation quota 104.8k/T.


  • China's military is to partake in a military exercise in Russia, their participation has nothing to do with the international situation.
  • Taiwan's Defence Ministry says they have detected 21 Chinese aircraft and five ships around Taiwan on Wednesday, via Reuters.
  • Iran is calling on the US to free jailed Iranian's, says they are prepared for prisoner swaps, via Fars.

US Event Calendar

  • 07:00: Aug. MBA Mortgage Applications, prior 0.2%
  • 08:30: July Retail Sales Advance MoM, est. 0.1%, prior 1.0%
  • 08:30: July Retail Sales Ex Auto MoM, est. -0.1%, prior 1.0%
  • 08:30: July Retail Sales Control Group, est. 0.6%, prior 0.8%
  • 10:00: June Business Inventories, est. 1.4%, prior 1.4%
  • 14:00: July FOMC Meeting Minutes

DB's Tim Wessel concludes the overnight wrap

Starting in Europe, where the looming energy crisis remains at the forefront. An update from our team, who just published the fourth edition of their indispensable gas monitor (link here), where they note the surprisingly fast rebuild of German gas storage, driven by reductions in industrial activity, reduces the risk that rationing may become reality this winter. Many more insights within, so do read the full piece for analysis spanning scenarios. Keep in mind, that while gas may be available, it is set to come at a higher clearing price, which manifest itself in markets yesterday where European natural gas futures rose a further +2.64% to €226 per megawatt-hour, just shy of their closing record at €227 in March. But, that’s still well beneath their intraday high from March, where at one point they traded at €345. Further, one-year German power futures increased +6.30%, breaching €500 for the first time, closing at €507. Germany is weighing consumer relief measures in light of climbing consumer prices and also announced that planned nuclear facility closures would be “temporarily” postponed.

The upward energy price pressure and attenuated (albeit, not eliminated) risk of rationing pushed European sovereign yields higher. 10yr German bunds climbed +7.1bps to 0.97%, while 10yr OATs kept the pace, increasing +7.4bps. 10yr BTPs increased +15.9bps, widening sovereign spreads, while high yield crossover spreads widened +10.2bps in the credit space.

Equities were resilient, however, with the STOXX 600 posting a +0.16% gain after flitting around a narrow range all day. Regional indices were also robust to climbing energy prices, with the DAX up +0.68% and the CAC +0.34% higher. In the States the S&P 500 registered a modest +0.19% gain, with the NASDAQ mirroring the index, falling -0.19%. Retail shares drove the S&P on the day, with the two consumer sectors both gaining more than +1%, following strong earnings reports from Wal Mart and Home Depot.

Treasury yields also climbed, but the story was the further flattening in the curve. 2yr yields were +7.5bps higher while 10yr yields managed to increase just +1.6bps, leaving 2s10s at its second most negative close of the cycle at -46bps. 10yr yields are another basis point higher this morning. A hodgepodge of data painted a mixed picture. Housing permits beat expectations (+1674k vs. +1640k) while starts (+1446k vs. +1527k) fell to their slowest pace since February 2021. However, under the hood, even permits weren’t necessarily as strong as first glance, as single family permits fell -4.3% with gains in multifamily pushing the aggregate higher. Indeed, year-over-year, single family permits have now fallen -11.7% while multifamily permits are +23.5% higher. So the single family housing market continues to feel the impact of Fed tightening. Meanwhile, industrial production climbed +0.6% month-over-month (vs. +0.3%), with capacity utilization hitting its highest level since 2008 at 80.3%.

Drifting north of the border, Canadian inflation slowed to 7.6% YoY in July in line with estimates, while the average of core measures climbed to a record 5.3%. Bank of Canada Governor Macklem penned an opinion piece saying that while it looks like inflation may have peaked, “the bad news is that inflation will likely remain too high for some time.” In turn, Canadian OIS rates by December climbed +16.2bps.

In other data, the expectations component of the German ZEW survey fell to -55.3, its lowest level since October 2008 at the depths of the GFC. In the UK, regular pay (excluding bonuses) fell by -3.0% in real terms over the year to April-June 2022, its fastest decline on record.

On the Iranian nuclear deal, EU negotiators reportedly found Iran’s response constructive, though Iran still had some concerns. Notably, Iran is looking for guarantees that if a future US administration withdraws from the JCPOA the US will "have to pay a price”, seeking insulation from the vagaries of representative democracy.

Asian equity markets are trading higher after Wall Street’s solid performance overnight. The Nikkei (+0.76%) is leading gains across the region with the Hang Seng (+0.57%), the Shanghai Composite (+0.23%) and the CSI (+0.51%) all rebounding from its opening losses this morning. US futures are struggling to gain traction this morning with the S&P 500 (-0.02%) and NASDAQ 100 (-0.09%) trading just below flat.

The Reserve Bank of New Zealand lifted its official cash rate (OCR) for the fourth consecutive time by an expected +50bps to 3%, a seven-year high, while bringing forward the estimate of future rate increases. The central bank expects the OCR will reach 3.69% at the end of this year and expects it to peak at 4.1% in March 2023, higher and sooner than previously forecast.

Early morning data coming out from Japan showed that exports rose +19.0% y/y in July (v/s +17.6% expected) posting 17 straight months of gains while imports advanced +47.2% (v/s +45.5% expected) driven by global fuel inflation and a weakening yen. With the imports outweighing exports, the nation reported trade deficit for the 14th consecutive month, swelling to -2.13 trillion yen in July (v/s -1.91 trillion yen expected) compared to a revised deficit of -1.95 trillion yen in June.

In terms of the day ahead, the FOMC minutes from July will be the main highlight, and the other central bank speaker will be Fed Governor Bowman. Otherwise, earnings releases include Target, Lowe’s and Cisco Systems, and data releases include US retail sales and UK CPI for July.

Tyler Durden Wed, 08/17/2022 - 07:55

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S&P 3500 By Year End If QT Continues

"Don’t Fight the Fed" echoes through the financial media, Wall Street, and in the minds of retail and institutional investors. The phrasing pertaining…



“Don’t Fight the Fed” echoes through the financial media, Wall Street, and in the minds of retail and institutional investors. The phrasing pertaining to Fed-generated liquidity is often the sole basis for investors to chase bull markets when the Fed employs easy monetary policy. Unfortunately, some investors forget the phrase is equally meaningful when the Fed is not friendly to markets. As we share in this article, we have developed a model to track Fed liquidity, allowing us to quantify the Fed’s influence on the S&P 500.

Before unveiling our liquidity formula and its forecast for the S&P 500, it’s essential to discuss the three primary drivers by which the Fed is influencing liquidity: Reverse Repurchase (RRP), Treasury General Account (TGA), and the Fed’s balance sheet.

Reverse Repurchase Agreements (RRP)

The New York Fed uses numerous repo programs to manage the supply of cash in the banking system, thereby maintaining the Fed Funds rates within the FOMC’s target range. Currently, they are employing its RRP program to accomplish this task. In an RRP transaction, the Fed sells securities to a counterparty and simultaneously agrees to repurchase them at a future date. The duration is often overnight. The transaction temporarily reduces the supply of money from the banking system. Increasing daily RRP balances results in less system liquidity, and a declining balance reduces liquidity.

As shown below, RRP has been around for 20 years but was scarcely used until early 2021. The various pandemic-related rounds of fiscal stimulus and massive Fed liquidity efforts left banks and money market funds with excessive levels of cash. The excess liquidity would have pushed the Fed Funds rate lower than the target rate without the RRP program. As such, RRP sucks up liquidity, making Fed Funds easier for the Fed to manage.

The Fed has other repo tools, such as repurchase agreements and the standing repo facility, which can dampen money market rates by providing the banking system with liquidity.

The RRP facility has been increasing rapidly and now sits at over $2 trillion daily. Rising RRP balances are a drain on liquidity.

As money market yields rise with Fed Funds and asset markets perform poorly, investors tend to prefer higher cash balances. Such should keep RRP levels elevated for the time being.

Treasury General Account (TGA)

The Treasury General Account is the U.S. Treasury Department’s checking account. The account is held at the Federal Reserve Bank of New York. Like your checking account, the TGA receives deposits (tax receipts and proceeds from debt issuance) and makes payments.

The Fed doesn’t manage the TGA balances, but the surplus cash balance held at the Fed affects banking system liquidity. Fed liabilities (bank reserves) must equal its assets. Bank reserves are fodder allowing banks to make loans and, by default, print money. When the TGA account increases, bank reserves must fall, reducing banking system liquidity. Conversely, a shrinking TGA account adds reserves and liquidity to the banking system.

The graph below shows that TGA balances are elevated versus the pre-pandemic years but have fallen as the banking system normalizes from the massive fiscal cash injections. It will likely drop a bit more, but the TGA will not significantly impact liquidity, barring unusual circumstances.

tga account

Fed Balance Sheet

The Fed’s assets, mainly Treasury bonds and Mortgage-Backed Securities (MBS), are the liquidity elephant in the room. Its assets currently account for 75% of total Fed-sponsored liquidity and historically average over 90%.

When the Fed does Quantitative Easing (QE), they remove securities from the bond markets and, in their place, leaves reserves with the banks. Again, bank reserves can lead to loan creation which is the creation of new money. Ergo, QE adds to the system’s liquidity. Conversely, Quantitative Tightening (QT) removes liquidity and reserves from the system and increases the amount of securities in the market.

For this reason, QE tends to be bullish for stocks, and QT is bearish. 

Liquidity and Stock Prices

With an understanding of the three key factors driving banking system liquidity, we can create a Fed liquidity model. The size of the Fed’s assets less the sum of the TGA and RRP equals the amount of Fed-generated liquidity in the system. Recent changes in net liquidity shed light on how the S&P 500 trends.

The two graphs below compare the liquidity measure and the S&P 500. The first graph shows how the S&P 500 rose in line with liquidity through 2021, and both reversed simultaneously to start 2022. The dotted lines are quarterly moving averages to help smooth out the data. The moving averages track each other almost perfectly this year. The green dashed line forecasts liquidity based solely on the Fed’s plan to reduce its balance sheet by $95 billion a month. The S&P 500 could be close to 3500 by year-end if they follow through with their QT plans and the correlation holds up.

The second graph shares the same data but in scatter plot form. The correlation between liquidity and the S&P 500 is statistically significant, with an R-squared of 0.57. The orange dot shows the S&P 500 is about 3% overpriced based on liquidity.

liquidity Fed
liquidity S&P 500

The model does have an important caveat. Other factors become the predominant driver of market returns when the Fed is inactive and liquidity is relatively stable.  


The Fed is not the only game in town, but they are the biggest game in town. While many other factors account for stock price performance, liquidity may be the most important to grasp.

To drive home this point, recall March 2020, when covid struck the economy. Global economies were shutting down worldwide. Unemployment was soaring, and the economy was careening toward a depression. Despite zero clarity on the economic future, stocks began to rally strongly in late March. Why? Liquidity via fiscal stimulus and a surge in Fed QE purchases drove markets higher. The economic situation was awful, and earnings outlooks were crumbling, but liquidity trumped fundamentals. 

By accepting what the Fed does, right or wrong, and closely following its actions, we can quantify how liquidity will steer markets. On top of fundamental and technical analysis, this additional layer of research helps us better navigate the market’s twists, turns, and trends when the Fed is active.

The post S&P 3500 By Year End If QT Continues appeared first on RIA.

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