Do Yellen’s rate hike comments matter?

Treasury secretary Janet Yellen said rates might have to rise to cool an overheating economy. Shock, horror. Did no one give her Powell’s script? “It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat,” Yellen said during an economic forum at The Atlantic. “Even though the additional spending is relatively small relative to the size of the economy, it could cause some very modest increases in interest rates.”

Economics 101 shouldn’t offend markets or perturb investors – stocks hit session lows off the back of the remarks. But this was seen as a significant remark since it is a break with the Fed’s new policy stance. Now what’s she’s saying is demonstrably true: central banks raise rates to stop economies from ‘overheating’, since this tends to lead to bad things like inflation and misallocation if capital. It’s the kind of thing central bankers would normally say in normal times to signal a tightening cycle is imminent. But we are not in normal times and the Fed has been hammering its message home that its goal is not to quell forecast inflation, but to get back to full employment come-what-may. Some will flag the potential incursion into monetary policy by the Treasury as big no, but in this instance it’s not about central bank independence – Yellen is far too well versed in this topic and far too academic in her approach to be trying to strong arm the Fed.

But it’s very much the antithesis of the way the Fed has been playing things since the pandemic. We’ve all kind of assumed the Fed is happy to let the economy run hot, because it’s implicitly said so: employment is the goal, inflation can be overlooked until enough people have jobs. Now many of us have questioned the sustainability of such a pivot in policy and break with the traditional central bank approach, which has always been to remove the punch bowl before the party got out of a hand (overheating). But we’ve assumed that the Fed was so all-in it wouldn’t change course.

Of course, Janet Yellen is no longer ‘the Fed’. That’s now Jay Powell’s purview. Her comments – seen in isolation – are just the same in reverse as Mario Draghi’s persistent calls for economic, structural and fiscal reform in the EU. But she was the Fed chair so her words carry weight. Moreover, Yellen and Powell have been singing from the hymn sheet – they’re not at odds on this, which could lead some to think it’s part of the ‘masterplan’.

So, the question for market watchers is whether what the Treasury says about monetary policy is all that important. Yellen looks more like an interested outsider than a Fed mole. I don’t think it was choreographed to signal a Fed taper. I think it was a genuinely held belief that multi-trillion-dollar stimulus and infrastructure spending coming at a time of a major cyclical recovery and zero percent interest rates could lead the US economy to get a bit warm. Coming from a central bank background, it’s natural for her to think that ‘well we need to spend this money now, so rates might need to go up to compensate for all this extra money we’re printing at a later date’. It’s not, in my view, scripted policy manoeuvring. Just sensible observation – the Fed could do with this.

Indeed, Yellen later made these comments at the Wall Street Journal’s CEO Council Summit: “It’s not something I’m predicting or recommending … If anybody appreciates the independence of the Fed, I think that person is me, and I note that the Fed can be counted on to do whatever is necessary to achieve their dual mandate objectives.”

Market reaction? Rates were unmoved, with the benchmark US 10-year still nestled around 1.60% but richly priced tech stocks fell, leaving the Nasdaq down almost 2%, which would imply that rates might not be moving at the short end (I.e. her comments are not a taper signal), but investors do think cyclical and value areas of the market warrant more attention (rotation). If anything has been clear about the last few months, it’s that some corners of the market that have been overlooked by investors are gaining more kerb appeal as inflation expectations and nominal yields pick up. Yellen’s comments only further underline this trend. The S&P 500 wiped out Monday’s gains, sliding 0.7%. The DAX fell sharply but is up this morning as European markets stage a fightback. The FTSE 100 trades up 1% and making a fist of 7,000 again after pulling back from the 7040 area yesterday to finish well south of 7,000.

Where are stocks headed? We spend a tonne of time chatting about what signals central banks are sending and what vaccines might or might not do for the economy. But all you lot really want to know is where the market is going to be in a week, a month, six months maybe tops.

So given it’s early May and the market is permeated with a sense of trepidation as traders really do take one eye of their screens as summer approaches, now’s as good a time as any to look at the prospects for the broader stock market in the coming months.

The old ‘sell in May’ adage is doing the rounds of course. On seasonality, Stifel says: “We see the S&P 500 flat/down -5-10% May 1st to Oct-31st, 2021: Seasonality is especially applicable at this moment in time“. And Bank of America notes that the May-October period has the lowest average and median returns of any equivalent six-month period, looking at data going back to 1928. Maybe there is something in the ‘sell in May’ trope. Certainly, given the run-up in equities we have seen, the well understood macro picture and the propensity for yields to edge higher, a period of cooling off seems reasonable.

Earnings are powering ahead – we’ve just entering the last stretch of a blowout quarter in both the US and Europe. But this has been largely priced. Can corporates keep up the pace? The second quarter is meant to be even better – stimulus cheques are back, and GDP growth is seen powering ahead. Markets may not truly reflect just how strong this recovery will be. According to the Atlanta Fed Q2 growth is seen at 13.2% and the US economy will exceed its pre-pandemic peak before the quarter is over (as it should when you have pumped something like 20%-30% of GDP into the economy by way of fiscal stimulus and emergency relief packages). The money supply has ballooned; now is the time for the velocity of money to recover. We should be careful; we are already seeing some heinous year-on-year chart crime as economies recover.

Spending seems to be strong as the reopening of the global economy, but companies are experiencing supply chain problems and raw material shortages. This ought to push up inflation, raising nominal bond yields (though not necessarily real rates), which could hinder equity market returns over the coming months.

What about sentiment? Clearly investors are very bullish right now – they’re pretty well ‘all in’. BofA notes that Wall Street bullishness is at a post Financial Crisis high. „We have found Wall Street’s bullishness on stocks to be a reliable contrarian indicator. The current level is 50bp away from triggering a contrarian “Sell” signal,” they write.

And the technicals? In short, the S&P 500 appears very over-extended at current levels and retrace of around 400pts to 3,800 would be considered as the first stop in multi-month reversion to more sustainable levels. The Vix does not suggest market participants are overly concerned and some are making big bets on markets remaining tranquil for the next few months.

Valuations are harder to get a handle on – the Case Shiller PE ratio is at 37, its highest since the dotcom boom – indeed it has only ever been this high during that period of ebullience and irrational exuberance. But given the rebound in the economy and earnings taking place and expected to continue, this backwards-looking metric is probably less reliable now than at other times (the Fed has already made somewhat outdated as a gauge of stress in the market). Forward multiples are less exaggerated – about x22 the next 12 months earnings. This is still relatively high but until the Fed removes the punchbowl, it can be sustained. Margin debt has exploded, suggestive of a large amount of leverage in stock markets that could be exposed to a sharp correction, making a pullback self-sustaining.

Should you worry? A lot depends on monetary policy reaction function. In other words, how do central banks respond to changing economic circumstances. More simply, when does the Fed remove the punchbowl? To be even more precise, at what point does the Fed start to signal it might start thinking about turning the music off. Yellen may have fired the starting pistol, but I now think Powell and co will work hard to row that back and reiterate their commitment to employment goals – I don’t think that has changed.

It’s like a game of musical chairs where everyone has worked out that it’s better to rush for a seat when the compere is looking like he might press stop than wait until the music actually finishes. US economic growth and spending this year could be even stronger than expected – this could push the Fed to tighten policy sooner than markets expect – or as we might surmise from Yellen’s remarks, the fiscal impetus could force the Fed to move sooner than it thinks it needs to. But only if employment recovers to pre-pandemic levels. If it does not, the Fed could keep administering kool aid for longer. Inflation remains the big unknown and has the potential to derail growth. Either way, yields should tend to move higher over the summer as data comes in, this could drive up rates and hurt equities even if it also means a weaker dollar as real rates in Europe move up.

Tesla questions remain, BP and HSBC profits leap, GME roars higher on equity offering

Record highs for the S&P 500 and Nasdaq yesterday failed to really kick start the European session this morning with the major bourses all looking a bit sloppy in the face of a raft of big corporate earnings announcements. We’re into the meat of earnings season proper now with 173 S&P 500 companies that account for around half the market capitalisation are reporting this week. So far so good: of those that have already reported, revenues are up 10% on average, while earnings are up by a third. A stunning turnaround from last year’s pandemic washout, driven by a combination of massive fiscal stimulus, extraordinarily accommodative monetary policy and a vaccine-led cyclical bounce back of epic proportions.

Tesla posted better-than-expected earnings in the first quarter. The company posted GAAP net income of $438m with earnings per share coming in at $0.93 on $10.39 billion in revenue, up 74% from a year ago. Some $518m in regulatory credits helped, whilst it added $101m to its bottom line from the sale of Bitcoin after its $1.5bn ‘investment’ announced in February. Is this an automaker or not? I have been very sceptical about this Bitcoin position and what it exposes the company to. Shares slipped more than 2% in after-hours trade following the results. Still, it was a record quarter for sales and progress is being made on the delayed new models with the new Model S landing on customers’ driveways by May 2021 and Model X deliveries to commence in Q3. Tesla also pointed to Model Y production ramps at Fremont and Shanghai going well. Meanwhile buildout of Berlin ‘Gigafactory’ is continuing to move forward, with production and deliveries remaining on track for late 2021, Tesla said. Chip shortages are a problem, but Tesla suggests it’s finding ways around. And although margins did pic up, there are maybe some questions over margins with the lower average selling prices – excluding regulatory credits the margins in the core auto business were 22%. I don’t think these results really tell us an awful lot more than we already know about Tesla.

BP profits jumped to $2.6bn, easily beating analyst expectations and well ahead of last year. Looney says the company is in good shape. As he puts it, these results really put to rest some of the fears investors may have had around this stock as it’s managed to reduce net debt ahead of schedule and is delivering shareholder returns. Looney seems really committed to pushing the dividend, which I suppose you can do if you are not doing any more oil and gas exploration. Still, he better keep some back for those wind turbines. BP is confident that China and the US will drive the recovery in crude demand.

The reduction in net debt is eye-catching, with the figure down around $18bn in the last year from $51.4bn to $33.3bn, meeting the objective a year early. Reported profit for the quarter was $4.7bn, compared with $1.4bn profit in Q4 2020 and a loss of more than $4.3bn a year before. Underlying replacement cost profit came in at $2.6bn, compared with $0.1bn for the previous quarter. BP said this was driven by an exceptional gas marketing and trading performance, significantly higher oil prices and higher refining margins. Dividend of 5.25 cents per share declared and shares rose more than 2% in early trade in London.

HSBC profits rose 79% from a year ago on a mixture of improving economic conditions and a reduction in provisions for bad loans. Among other things, the company noted solid growth in Hong Kong and UK mortgages. Interestingly for a bank that has been seen to put all its eggs in one Asian basket as other regions have been less profitable, all regions were profitable in Q1 and notably the UK bank reported pre-tax profits of over $1bn in the quarter. Reported profit after tax was up 82% to $4.6bn, while reported profit before tax rose 79% to $5.8bn. The bank said that reduced revenues, which fell 5% $13bn, continued to reflect low-interest rates. Provisions for bad loans were less than expected, particularly in the UK, mainly reflecting a better economic outlook and government support schemes. As such reported provisions for bad loans was a net release of $0.4bn, compared with a $3.0bn charge a year ago. Shares rose a touch in early trade.

Sticking with banks – UBS this morning admitted it took a $774m hit from the Archegos fiasco. This is not as large as the $5.5bn for Credit Suisse, but nevertheless shows how the fallout was wider than initially thought. Despite this, profits at UBS rose 14% to $1.8bn. Wealth management profits rose 16%, whilst investment banking was down 42%. UBS, which has fallen 2% this morning on the update, says it has now unwound all its exposure to Archegos. Nomura meanwhile says it is 97% out and has taken a $2.3bn loss on its Archegos exposure, adding that it expects to book about $570m more in charges related to Archegos this financial year.

Shares in GameStop rallied almost 12% and added a further 9% in after-hours trade to hit $184.50 after the company completed its at-the-market equity offering. In an update to investors yesterday, management said they had sold 3.5m shares of common stock and generated aggregate gross proceeds before commissions and offering expenses of approximately $551m, Roughly, that means they got this offering off at about $157 per share. Net proceeds will be used to continue accelerating GameStop’s transformation as well as for general corporate purposes and further strengthening the company’s balance sheet.

As I previously argued, shareholders who have been bidding up the stock should be pleased by the offering. Although it entrails a meaty dilution, the cash call is entirely expected and without a big capital raise now that takes advantage of rally in the stock, Chewy.com founder Cohen might not have the cash to fulfil the ambition of becoming the Amazon of Gaming.

Elsewhere, oil prices trade higher with WTI back above $62 as OPEC’s technical committee stuck to an optimistic view of demand growth whilst also cautioning about the rise of the coronavirus in India, the world’s number three importer of crude. The technical committee, which met ahead of Wednesday’s meeting, indicated that demand growth is still seen around 6m bpd in 2021, whilst the stock surplus should be eliminated by the end of the second quarter. There are also concerns about Japan, the fourth largest importer of oil. Copper prices continue to advance, hitting a fresh 10-year high this morning, whilst US 10-year yields pulled back from 1.6% yesterday in a choppy session ahead of this week’s Fed meeting.

FOMC preview: Wait and see mode

The Federal Reserve kicks off its two-meeting today. This week’s meeting of the Federal Open Market Committee (FOMC) ought to pass off without too much fanfare or market noise. Even as the economic indicators improve, the Federal Reserve remains in emergency mode. The Fed should be thinking about thinking about tapering, but it likely will not want to signal this just yet. It remains the case, it should be noted, that the Fed is now in a reactive policy stance where it is waiting for the data to hit certain thresholds rather than acting pre-emptively. We also know that not only is the Fed happy to let inflation get hot, but it is also focused squarely not just on employment but the ‘right’ people getting jobs. It’s a central bank that is taking a political angle to its policy making. In any event, tapering of the Fed’s $120bn-a-month asset purchase programme will be signalled well in advance, and this is not the time to do it.

Bond yields have cooled somewhat since the March meeting, with the 10-year note chopping around in a 1.55%-1.60%. In any event, if the rise in nominal yields was not a worry then, it’s certainly not one now. Fed speakers including chairman Powell have made it clear they think rates will move up because of the screaming cyclical bounce, not because people are worried about inflation.

Meanwhile, since the March meeting the pace of vaccinations has meant over half of all adults in the US have had at least one vaccination. Jobless claims have hit the lowest since the pandemic struck more than a year before and retail sales are powering head. The IHS Markit composite PMI hit a record high in April as all corners of the economy picked up steam. Despite this the Fed will remain cautious with regards to the outlook, citing the risk of fresh infections. Chairman Powell will need to acknowledge the economic recovery in progress but seek to tamp down expectations. And despite the strong demand impulse combining with weak supply to put upwards pressure on prices, he will stick to the line that any inflation will be temporary.

Stocks wobble again, oil up, Musk tweet lifts Bitcoin

Stocks are looking a bit wobbly again this morning, whilst the US dollar is bid and the euro trades at a four-month low. European bourses are broadly lower as indices continue to retreat in the face of rising cases, a recovery that could be already priced in, doubts about the sustainability of monetary and fiscal support etc, etc. If you look at this we are just seeing a bit of a pullback from the recent highs (record highs for the DAX, US, Global), whilst the FTSE 100 is simply around the middle of its 4-month range. One year into the bull market – the S&P 500 had its best 12 months since the 1930s – US markets were lower yesterday as Treasury Secretary Janet Yellen said Biden’s $3tn economic would need to be paid for by tax rises. RobinHood has confidentially filed documents with the SEC in preparation to list, whilst GameStop shares fell after-hours following the company’s first earnings since the January frenzy.

Just as Britain’s excess death level falls below the 5-year average for the first time in months, the EU is set to announce fresh rules to allow it to control vaccine exports. Officials are playing down the importance of it, saying it’s nought but a scrap of paper to let governments take action if required, but it smacks of protectionism and is not going to down well in Britain. Meanwhile, after questions were raised by the US National Institute of Allergy and Infectious Diseases (NIAID), AstraZeneca said it will reissue vaccine data within 48 hours, saying that the numbers released Monday were based on a „pre-specified interim analysis” with a cut-off date in mid-February. The all-seeing Dr Fauci said the press release from AstraZeneca could be misleading. Another blow to confidence, another PR nightmare for Astra, which has been dogged by doubters ever since it released its preliminary results for the vaccine last year. It’s a lesson in how, no matter how good you are, you need to be good at communicating this to people or they just won’t believe it.

Suez crisis: Oil prices moved higher today after a massive container ship blocked the Suez Canal in both direction, which followed the sharp demand-driven fall on Tuesday amid doubts about the demand-led recovery from Europe this summer and another build in oil inventories. The API said crude oil stockpiles rose 2.9m barrels last week – EIA figures on tap later are expected to show a build of 1.4m barrels.

Bitcoin jumped above $56,300 from under $54,000 earlier this morning as Elon Musk shilled, I mean tweeted, about it again. It’s not a clear break and not that big a deal given how much Bitcoin moves around at these levels but there was a discernible sustained rally after Musk tweeted:

You can now buy a Tesla with Bitcoin.

Tesla is using only internal & open source software & operates Bitcoin nodes directly. Bitcoin paid to Tesla will be retained as Bitcoin, not converted to fiat currency.

Bitcoin rises after Elon Musk tweet.

European flash manufacturing and services PMIs show bullishness despite rising infection rates. I think this is interesting since although new restrictions in some of the major economies, businesses remain upbeat. The survey data was collected between March 12th and 23rd, so it is very much up to date. Whilst compilers IHS Markit note that the outlook as deteriorated amid rising infection rates, business activity is strong, particularly in manufacturing. (read DAX outperformance in the cyclical recovery). The flash Eurozone composite PMI rose to an 8-month high at 52.5, with a clear two-speed recovery evident with Services still in contraction territory at 48.8, albeit this was a 7-month high, whilst manufacturing hit a record high at 62.4.

Inflation, inflation, where art thou, inflation? Inflation in the UK fell last month as cars, clothes and games dragged the consumer prices index (CPI) lower. CPI rose by 0.4% in the 12 months to February 2021, down from 0.7% to January 2020. As with the recent US data, this is going to be the last easy print ahead of the spring as base effects and –fingers crossed – cyclical recovery boost inflation readings. The pandemic has skewed a lot of the usual seasonal data so we need to be careful about reading too much into any one print.

Everyone’s favourite stock, GameStop shares fell over 12% in after-hours trade as fourth quarter earnings missed on the top and bottom line. EPS came in at $1.34 on $2.12bn in revenues, both a little light. But e-commerce sales rose 175% – woohoo the next Amazon of gaming is here. Well not quite. There was not a whole lot of detail about the strategy, though it does seem they will raise capital by selling shares. This may have hit the stock after-market as it initially rose on the earnings release. Meanwhile many investors were left disappointed by a lack of a Q&A session. GameStop has been pretty tight-lipped through all of this frenzy, but you would have thought that this earnings call would have afforded management the opportunity to speak to investors openly. YTD gains remain solid at +864%.

On the tape today there are several Fed speakers, including Williams, Daly and Evans, as well as Jay Powell and Janet Yellen’s second day of testimony in Congress on the CARES Act. ECB chief Christine Lagarde is also due to speak. On the data front watch for the US flash manufacturing and services PMIs and durable goods orders.

Fedspeak

Powell and Yellen did their double act yesterday, delivering testimony to lawmakers about the economic response to the pandemic. It wasn’t quite Kris and Rita, but the way Treasury and Fed are in harmony is new. Full MMT? Not quite. Biden’ $3tn stimulus plans on top of the $1.9tn just launched – and all the stimulus last year – suggests the government just doesn’t care a heck of a lot about deficits. Except Yellen stressed that the $3tn economic plan would require tax hikes. Investors sat up, the Dow sold off in the afternoon after trading flat in the morning. What is unclear is the degree to which this could be debt-funded, and to what extent increasing taxes could amount to fiscal tightening (the idea is that it won’t as it will be targeted at those who exert the lowest marginal impact on spending, in other words, the rich). Powell said that the economic recovery from the pandemic had “progressed more quickly than generally expected and looks to be strengthening.” Yellen thinks the economy will be back to full employment next year.

Fed governor Lael Brainard said the central bank will show “resolute patience while the gap closes between current conditions and the maximum-employment and average inflation outcomes in the guidance” rather than taking “pre-emptive” action.

Dallas Fed president Robert Kaplan said he expects rates to back up further, but this would be a healthy signal and he would not want to get in the way. Kaplan also came out of the closet to say he was one of those on the FOMC calling for a rate hike in 2022 – hardly a surprise given he is one of the most hawkish members. Also worth noting he is not a voting member this year or next, so his hawkishness won’t have any real effect on Fed policy over the next 22 months. The Dallas Fed president also said: „the first step for withdrawing accommodation would be to reduce the Fed’s asset purchases,” which matches our expectations that the Fed will seek to taper its $120bn bond buying programme before it looks to think about thinking about raising rates. If the current market positioning is right, this would indicate that the Fed may need to start the tapering wheels in motion as early as its June meeting. Kaplan reiterated the Fed’s central stance that inflation will rise this year but not be sustained, and that it’s good to do a lot now rather than waiting. And he suggested than anything to distort the yield curve any more than the Fed is already doing by its massive bond buying programme would be less helpful – ie no Twist.

FX

No one can escape dollar strength right now. The Dollar index has popped above the recent swing high to its highest since November with the 200-day SMA firmly within the bulls’ sights at 92.6720, which should offer resistance near term at least.

The euro trades this morning at its weakest in 4 months after breaking down at the 200-day SMA at 1.1850.

The euro trades this morning at its weakest in 4 months.

GBPUSD has cracked key trend support and now bears will eye a squeeze back to the 100-day moving average a little above 1.36.

GBPUSD has cracked key trend support.

SLR exemption to end

Rates backed up a touch and we saw some movement on NDX futs as the Fed announced it will let the SLR exemption expire as planned on Mar 31st. Following yesterday’s spike there was not a lot of bid coming back in bonds. There is some debate about whether ending the SLR exemption will lead to selling of Treasuries by banks, but what is obvious is that the Fed is confident to let things move now and this means we should be seeing higher yields still. It’s a good sign that the Fed is confident in the way some of the market plumbing like repo markets are functioning well and some of the supports for banks can be removed. 

 

Remember it’s quad witching today so expect added volatility in addition to the whole yield freak out – US stock options, stock futures, market index futures and market index options all expire. NDX tested 12,760 ahead of the cash open as the SLR news broke – bearing in mind these expiries it will be choppy again if investors decide to take risk off table ahead of the weekend. 12,730 looks to be the area of interest today and a breach to the downside at this level could open further selling towards the March lows around 12,200.

 

Banks slipped pre-market with JPMorgan down 2% on the leverage ratio change. 

 

Nike fell in the pre-market after it said congested ports in the US meant sales fell short, although it delivered EPS of $0.90 – 14 cents ahead of forecast. FedEx shares rose 5% in pre-mkt as it reported a bumper holiday season. EPS came in at $3.47 vs $3.23 expected. Revenue rose 23% to $21.51bn from $17.49bn a year ago. Tesla shares are a little lower in the pre-mkt whilst Ford is up after an upgrade from Barclays. 

 

Elsewhere stocks are broadly lower this afternoon in Europe as the week ends on a bum note following the spike in rates and some wobbly thinking vis-a-vis vaccines.  DAX holding up ok for the week but the FTSE seems set to finish lower and is about 1% off today.

 

Sterling is weaker as the dollar has come back to life with the uptick in yields supportive of the greenback. GBPUSD sank to LOD around 1.3850 at pixel time to test the low of Wednesday. Breach here calls for retest of the 1.380 area, the week low. 

Cautious start to trade ahead of FOMC’s game of join the dots

Boy the food at this place is really terrible – and such small portions! France’s suggestion it could sue AstraZeneca over a lack of vaccine deliveries rather smacks of not wanting a cake and not eat it. Cases across France and Germany are rising fast and with the vaccine rollout so shambolic across the Eurozone, it creates worry about the pace of economic recovery in the bloc. That has not massively dented the mood in the markets yet – stocks are not the real economy etc, plus rebounding car sales are a boost (see BMW, VW) and plans for a vaccine passport should spur travel this summer – but it could be a problem for the currency.

A cautious mood prevails in global stock markets this morning ahead of the Federal Reserve meeting. Stocks are hugging the flatline in early trade, whilst US futures are flat as really nothing matters today except the Fed, its dots and what Jay Powell says in the presser after.

Uber shares are lower in the pre-mkt after it announced some measures to comply with the UK Supreme Court by offering drivers employee-like status. I say some measures since it looks like drivers won’t be entitled to a minimum wage whilst logged on waiting for a client, but only when they have a fare or are going to pick them up. I don’t think this complies fully with the court’s ruling and Uber could face fresh action. Sticking with cars and it is very interesting to see VW and BMW come back strong and this poses very clear challenges to a certain Tesla stock, which fell another 4%.

Yesterday the FTSE 100 managed to close above 6,800 for the first time since mid-January. The Dow Jones industrial average declined 130pts, or 0.4%, from its record high. The S&P 500 was 0.16% lower, ending a 5-day win streak. The Russell 2000 small cap index fell 1.7% and the Nasdaq rose. US 10-year rates nudged up above 1.63% despite strong demand at a 20-year auction. The Vix – the ‘fear gauge’ – declined to its lowest in a year.

Fed preview: Join the dots

The market will be watching this very closely indeed. This is going to be a tough one for the Federal Reserve and its chair as it’s going to be a hard sell to contain yields and inflation expectations. The problem is that the market is already pricing in a big recovery but the Fed is trying to say ‘not yet’, we’ve still got some way to go. This dichotomy exists largely because employment has become the Fed’s go-to measure of monetary policy outcomes, which is new, and not really what markets are looking at (earnings, GDP). Doublespeak is a risky game – the ECB has been tying itself in knots over its communication. Jerome Powell has been much clearer and has been sticking to his guns ahead of this meeting, despite the greatly improved economic outlook, the rapid rollout of vaccines in the US and – crucially – a spike in bond yields. Coming into the meeting we note 10-year Treasury inflation-protected securities breakeven inflation rate hit 2.303%, the highest since July 2014. 5-year breakevens are at the highest since 2008.

Overall, the Fed is still in very much in accommodation mode – keeping the punchbowl filled up and will want to not let the market think it is bringing forward its rate hike expectations or tapering bond purchases. The Fed has made it clear that its goal is maximum employment and will keep the punchbowl filled up until it gets there. Powell will stick to the script but the market will make up its own mind about what this means for the path of rates and inflation – and the US dollar.

Key questions for the Fed today

Do enough members move their dots to a point where the market sits up and reacts? It seems unlikely that enough members will bring their dots forward to move the median plot much nearer than the first hike of 25bps occurring before the end of 2023, which is still short of the current market positioning which indicates a hike in 2022. An additional 5 members of the total 18 would need to pencil in a hike 2023 to move the median dot. So really this ought not to have much impact on the market – a signal that more than 6 policymakers – say around half or even a majority – are thinking early 2023 would be noteworthy.

Table: Current dots from December

Current dots from December

Is the Fed more likely to lean on long yields (eg a Twist operation) or appear happy to let then run higher and then chase with hikes? The economic fundamentals and cyclical upswing in growth and inflation suggest the latter – the Fed has been talking more about yields being a function of recovery than worrying about inflation. But it won’t want to signal that it’s really bringing forward hike expectations too rapidly, either.

Does it extend supplementary Leverage Ratio (SLR) relief for banks beyond the March 31st deadline. I think it’s unlikely but there may be some action to try and prevent dumping on Treasuries onto the market and the volatility this could generate. I should note that the excellent Zoltan Pozsar of Credit Suisse argues that it won’t be a problem anyway since the vast bulk of Treasuries which are currently exempt from SLR are booked at bank operating subsidiaries, not broker-dealer subsidiaries. “The market assumes that the SLR exemption is what has ‘glued’ the rates market together since 2020, and that the end of exemption means that large US banks will have to sell Treasuries. That view is wrong.” We will find out.

What does transitory really look like in an inflation context? How much above 2% and for how long would warrant action? I think on this we will find out more come June when the prints start shooting higher.

Stick: On March 4th, Powell said the Fed would need to see a broader increase across the rate spectrum before considering any action and stressed that the current policy stance is appropriate. He didn’t signal the Fed was in any rush to do anything about rising yields – there was not the slightest hint the Fed was looking to control the yield curve or carry out a twist operation. The closest hint of concern was this: “We monitor a broad range of financial conditions and we think that we are a long way from our goals,” Powell said, adding: “I would be concerned by disorderly conditions in markets or persistent tightening in financial conditions that threatens the achievement of our goals.” Powell stressed that the Fed is a long way from achieving its goals of full employment and averaging 2% inflation over time.

GDP and inflation expectations have risen since the last dot plot in Dec, and this should be reflected in the forecasts. The OECD raised its growth outlook for the US this year, as have some investment banks. Goldman Sachs raised its forecast to 8% this year, while Deutsche Bank raised its forecast to 6.6% growth, up from 4% seen in November. The 4.2% projection for 2021 GDP growth projection looks outdated for sure.

The OECD raised its growth outlook for the US this year.

But a much stronger economic outlook is not going to stop the Fed from holding fire for now. Powell has spoken enough times about the ‘real’ unemployment rate being closer to 10%. And the Fed is no longer looking at the inflation dynamics and Philip’s Curve – it’s on a mission to right wrongs and get employment back. The Fed will not move on rates and will continue to purchase $80bn of Treasuries and $40bn of mortgage-backed securities each month. Any significant move is unlikely to occur before June, when we might start to see the Fed respond to rising employment levels by voicing a more optimistic economic outlook that warrants a tapering of asset purchases.

Does the Fed signal that inflation will be more than just transitory? If not, can it convince us it will be temporary? Inflation remains the elephant in the room – does it materialise in force and how long does that last. Things could get uncomfortable for the Fed from a market perspective over the coming months as base effects lead to a pickup in inflation readings, which will undoubtedly create upwards pressure on yields whatever amount of rationalising about the data. The Fed will want to use this meeting to reiterate that it is happy with this – indeed AIT implies running a hot economy/inflation to counterattacks years of systematic undershooting of its target.

The other big elephant in the room is issuance – if the Fed really is eyeing a tapering of asset purchases this year (not to be signalled today), then where does that leave long-end yields as Biden – fresh from his $1.9tn Covid relief- swivels his attention to a potential $3tn green/infrastructure bill. How is the market going to absorb all this extra issuance if the Fed is not there to hold the bag? As I suggested yesterday, I think this implies structurally higher bond yields and inflation.

So, it’s interesting to come to the latest BoA Fund manager survey, which reports that the biggest risk seen by investors is inflation or a taper tantrum. This is the first time the pandemic has not been the chief risk for markets in over a year. We have turned a corner for sure – but shouldn’t investors be welcoming economic growth? The consensus from the survey seems to be that 10s hitting 2% would spark a 10% correction in equities and that a 2.5% yield makes bonds more attractive than stocks.

Oil – WTI futures dipped under $64 for a week low yesterday as the nearest months flipped into contango, indicating a slightly looser market than we have been discussing. That seems in large part down to inventory builds in the US as the effects of the weather event in Texas etc refiners were shut in. It may also reflect some worry about tax hikes and global demand worries in light of the European situation. On the whole, the market remains pretty tight this year and should be reflected in higher prices after this period of consolidation. Futures recovered the $65 handle though as the API reported a draw in crude oil inventories of 1 million barrels for the week ending March 12th. Draws on gasoline and distillates were also reported, though much smaller than in previous weeks. This could indicate the US situation is stabilized and we return to a period of healthy draws on inventories as the market tightens.

Ahead of the Fed, gold will be one to watch – continues to trade in a narrow range and failing to break the upside resistance at $1,740. The Fed is likely to deliver action here.

Ahead of the Fed, gold will be one to watch

Excess is good for the stock market

Me, You, Madness…no it’s not a story about Roaring Kitty, GameStop and Melvin, though someone has to make that into a film (Michael Lewis will be writing the novel already, I’m sure). It’s actually a 2021 film starring Louise Linton, wife of ex Treasury secretary Steve Mnuchin. I have not seen it, but I have seen the trailer. The setup sounds fun – Linton plays a psychopathic hedge fund boss. But while it contains just everything you can cram into a feature film; it looks exceptionally bad. So bad it’s actually good. Maybe. How it ranks in the canon remains to be seen. It’s really a vanity project, which is really a form of excess that we see in lots of corners of the market right now – think Tesla, the meme stocks, Bitcoin (just don’t include the FTSE…).

Biden’s $1.9tn stimulus package is probably excessive. t’s certainly full of waste, full of ways to prop up failing businesses and deliver helicopter money to a lot of people who don’t really need it. The economy is rebounding anyway. Jobs are coming back. A lot of the money will find its way into things like paintings, cars or fine wine. It will also find its way into stocks, or crypto-assets, or even non-fungible tokens (NFTs).

It will also find its way into paying down debt, and this is huge. The US government is embarking on a massive debt transfer from households to government. It can unleash huge potential by transferring the burden from productive capital (private) to unproductive (public) and is potentially one of the most explosive forces in capital markets in several generations. This transfer of debt will unleash entrepreneurial spirits that would otherwise be restricted. I fail to see how it do anything but increase asset prices, including stocks – despite the rise in yields. It allows households to take on more debt, start businesses and buy more stuff. It also lets them invest in stocks directly. The craziest thing is that it won’t help inequality- poor folks need the money for bills, food etc. Middle class folks will put the money to work. Those without big outgoings will reduce debt so they take on more risk in future because they’re not saddled with big debt obligations like student loans. We’re going to be hit by a massive surge in growth and bond yields will spiral. Inflation will spike and unless the fed gets a grip, it will lose control of inflation. I feel like we’re at the start of a massive economic boom, at least in the US, where policy makers have been vastly more ambitious than they have elsewhere.  I might be over-egging the pudding, but I sense people don’t appreciate just how important this debt transfer is going to be for the structure of markets and the economy.

Inflation is dead. Inflation is temporary… 

Year-on-year comps will start to show inflation rising. The NY Fed’s Empire State Manufacturing Survey yesterday contained something interesting in its inflation component: „Input price increases continued to pick up, rising at the fastest pace in nearly a decade and selling prices increased significantly.“ Other datasets have shown input prices starting to inflate at the fastest pace in years.

Yesterday I touched on the way [some] central banks seemed kind of unconcerned by the rise in yields – last time he spoke Powell didn’t take the opportunity to push back against the rise in yields (no hint of a Twist), and the BoE’s Bailey said yields are rising because of growth. And now we have the RBA – the first to blink by stepping up asset purchases to counter the rise in bond yields – saying in the minutes to its last meeting that the gyrations in bonds are not that significant. And now the ECB – after another communication failure by Christine Lagarde – says yield curve control is unnecessary. ECB chief economist Philip Lane pointed out to the FT that the is not like the last crisis with years of lost output. Which means CBs don’t need to worry about taming yields in the same way.

The mantra seems to be that inflation – previously thought dead – will only be temporary and yields are just moving up because economic activity will hit 2019 levels this year. It’s just not that simple: yields reflect the fact that there is a lot more cash sloshing around – US bank reserves have doubled to about $3.4tn since the start of the pandemic. More stimulus, more growth, more money in the system, more debt issuance – yields are marching higher for number of reasons but mainly reflect growth expectations, inflation expectations and issuance – both real and expected. The extent each exerts a pull on yields (and the extent to which each is affecting the other) is obviously up for a lot of debate and a lot harder to measure. But what seems clear to me is that yields are facing a lot of upwards pressure. Then we have market functioning elements like extending SLR – failure to extend could see a heap of Treasuries come onto the market, making things more volatile.

But I think the big question that we are yet to really answer is how much markets are worrying about debt. I’ve banged on a lot about MMT before – deficits don’t matter and all that – not with any real view on what we should be doing, but rather with an interest in the debate about how we approach fiscal and monetary policy. If markets really are worried about the debt and their ability to absorb all this issuance, then it probably does have some important long-term implications, such as whether you can keep running perpetual deficits, can you always just increase the debt ceiling, and should you look to balance the books? How quickly do you suck the money back out of the system? And with the Democrats gaining those Senate seats in Georgia there is a lot more stimulus coming over the hill.

The back up in long end real rates took off on January 5th – after the Georgia runoffs – indicating people think issuance is a factor.

The back up in long end real rates took off on January 5th.

Inflation expectations are at multi-year highs.

Inflation expectations are at multi-year highs

Stocks in Europe took the cue from a positive session on Wall Street, with the main bourses mounting a fresh stab higher after yesterday’s early promise somewhat fizzled out in the latter part of the session. Positive Zalando and VW updates provided comfort to the Stoxx 600, whilst the DAX rose 0.6% in early trade. The FTSE 100 trades higher with a fresh attempt to clear the big resistance around 6,800 – near-term trend support is about to run into this level so a big test lies ahead with a possible leg up should 6,800 finally be taken out with conviction. Overall the mood in Europe was probably constrained yesterday by several countries halting the AstraZeneca vaccine, but this should prove a major constraint for the market.

The FTSE 100 trades higher.

Did you doubt that the arrival of ‘stimmy’ cheques would do anything other lift stocks? Yields didn’t really do anything so there wasn’t that immediate stress for the growth end of the market. Investors are looking at the yields and probably thinking yes it means multiple compression, but then you have to look at the $1.9tn coming over the hill at a moment of a strong cyclical recovery as fresh juice. US 10-year notes hovered around 1.6%. The Nasdaq 100 ended up 1% and the best of the induces after a big rally into the close. The Dow Jones rose 0.5% to a fresh record high as it notched its 7th straight daily gain. The S&P 500 also made a fresh ATH after rising 0.65% – its 5th straight day of gains. Futures point to another higher open.

Tesla rose 2% despite the company saying that Elon Musk’s title was changing to Technoking of Tesla, whilst CFO Zach Kirkhorn would henceforth be known as ‘Master of Coin’. GameStop sank almost 17%, AMC Entertainment rose 25% as it embarks on reopening cinemas. Keep your eye on these meme stocks as stimulus cheques could do a lot of work for them.

Yields remain the big threat to daily gains – if you see Treasury yields pop it will rock the market, but longer-term stocks can handle higher rates and unless there is another exogenous shock or a meltdown in funding markets like we saw with the repo stress a couple of years ago [watch that SLR decision], the path of least resistance is up. The Fed meeting this week is the clear risk event for yields but today we also have US retail sales to watch.

Sterling retreated to a one-week low vs the dollar. GBPUSD declined to around 1.3830 and may seek a test of the 50day SMA. The yield on 10-year gilts spiked to 0.86%, the highest in a year, but has this morning retreated back under 0.8%.

Sterling retreated to a one-week low vs the dollar.

Bitcoin trades higher this morning with the 200-hour SMA offering the support. MACD bullish crossover seen.

Bitcoin trades higher this morning.

Wochenausblick: Arbeitslosenzahlen und Einzelhandelsabsatzzahlen plus FOMC Sitzungsprotokolle und weltweite PMIs

Uns erwartet eine geschäftige Woche. Zuerst kommen die Zahlen zur US-Arbeitslosigkeit, die zeigen werden, wie einschneidend die anhaltende Pandemie für den US-Arbeitsmarkt wirklich ist. Nach den enttäuschenden Ergebnissen der Feiertage werden nun die neuen US-Einzelhandelsabsatzzahlen werden ebenfalls veröffentlicht. Wir haben außerdem die FOMC-Sitzungsprotokolle, während von überall auf der Welt die PMI-Zahlen veröffentlicht werden.

Werden die US-Arbeitslosenzahlen weiter zugenommen haben?

Die Pandemie lässt den Arbeitsmarkt weiter wackeln. US-Arbeitslosenzahlen werden nächste Woche veröffentlicht und wenn man sich die letzten Zahlen anguckt, ist der Ausblick getrübt.

Die Zahlen für die erste Februarwoche 2021 sind noch nicht veröffentlicht worden, aber die Zahlen für die am 30. Januar endende Woche könnten Anhaltspunkte liefern.

Statistiken des amerikanischen Ministeriums für Arbeit zeigen, dass in der Zeit 779.000 Anträge gestellt wurden, gegen 830.000. Ein weiteres Absinken unter die 900.000, der Nummer, die in den Monaten Ende 2020 häufiger zu sehen war. Die Arbeitslosigkeit insgesamt liegt, Stand vom 5. Februar, bei 6,3%.

Allerdings beziehen etwa 17,5 Millionen Amerikaner immer noch irgendeine Form von Arbeitslosenhilfe. 7,2 Millionen erhalten Pandemie-Arbeitslosenhilfe, die eine Arbeitslosenversicherung für Leiharbeiter und andere darstellt, die keinen Anspruch auf die regulären Staatshilfen haben.

Die Beschäftigungszahlen, also die Anzahl der Arbeitsstellen, die neu zur US-Wirtschaft hinzugekommen sind, stagniert weiter, was darauf hindeutet, dass ein Wachstum der Beschäftigungszahlen noch in weiter Ferne liegt.

Die Arbeitslosigkeit ist nicht gut für die Wirtschaft. Weniger Geld in den Händen der Arbeitnehmer deutet auf eine geringere Kaufkraft hin, was bedeutet, dass die Einzelhandelsumsätze wahrscheinlich sinken werden (sehen Sie unten für weitere Einzelheiten), womit weniger Geld wird in der gesamten US-Wirtschaft im Umlauf sein und möglicherweise das Wachstum bremsen wird.

Bidens 1,9 Billionen USD Konjunkturpaket enthält eine Vielzahl von Regelungen, die kleinen Unternehmen und Geschäften helfen sollen, ihre Arbeiter zu halten und zu bezahlen. Wird es genug sein? Es scheint, als sei es auf dem schnellsten Weg vom Haus verabschiedet zu werden, aber die volle Wirkung wird kurzfristig nicht sichtbar sein, sondern erst, wenn Bargeld tatsächlich in die Hände der Unternehmen gelangt.

US-Einzelhandelsabsatzzahlen – eine weitere schlechte Leistung?

Wir werden sehen, welche anhaltenden Auswirkungen Covid-19 diese Woche auf den US-Einzelhandel hat, wenn eine neue Ladung Einzelhandelsdaten veröffentlicht wird.

Die Zahlen für Dezember waren den Zahlen des US-Handelsministeriums zufolge, die von Bloomberg zitiert wurden, um 0,7% gesunken, was die Erkenntnisse von MasterCard etwas abschwächt, dass die Verkaufszahlen der Feiertage die Erwartungen übertroffen hätte.

Traditionell sind die Feiertage die geschäftigste Einkaufszeit für US-Verbraucher. Wenn man dann noch Black Friday und Cyber Monday im gleichen Zeitraum hat, dann sollten zumindest die Online-Verkäufe eine solide Performance gezeigt haben.

Amazon hat außerdem berichtet, dass Cyber Monday 2020 der beste Shopping-Tag bisher überhaupt war, mit Verkäufen in diesen 24 Stunden in Höhe von 9,2 Milliarden USD. Auch die Verkäufe am Prime Day übertrafen mit 10,4 Milliarden USD die Erwartungen.

Wenn also Amazon einen Schub erlebt hat, warum sind die Einzelhandelsabsätze insgesamt runtergegangen? Lockdown bringt bei den klassischen Geschäften natürlich einiges durcheinander, aber der Verlust von Arbeitsplätzen wird wahrscheinlich die Kaufkraft der US-Öffentlichkeit insgesamt schwächen. Wahrscheinlich wird der Einzelhandel weiter Schläge einstecken müssen, so lange die Pandemie noch anhält.

Bloomberg berichtet, dass die Verluste der großen Einkaufsmärkte, Restaurants und anderen, nicht-Amazon Onlinehändlern zu dieser Abnahme geführt haben.

Wird das Konjunkturpaket helfen? Teil von Präsident Bidens jüngstem Konjunkturpaket sind Checks über 1.400 USD an jeden Amerikaner, die eventuell dazu führen könnten, dass Amerikaner wieder für mehr als nur das Notwendigste Geld ausgeben.

Aber wir werden erst wissen, wie die Dinge wirklich stehen, wenn die Zahlen für Januar nächsten Mittwoch veröffentlicht werden.

FOMC veröffentlicht die jüngsten Sitzungsprotokolle

Das Federal Open Markets Committee trat vor einigen Wochen zum ersten Mal im Jahr 2021 zusammen, und die Sitzungsprotokolle werden in der kommenden Woche für die Öffentlichkeit freigegeben.

Wir wissen aus Berichten, dass sich seit dem Treffen im Dezember nicht viel geändert hat: Eine langfristig bullische Aussicht, getrieben von Impfstoff und Konjunkturpaket, aber kurzfristige Risiken. Während Konjunkturpaket und Impfstoffe die Hoffnungen für die Zukunft stark ankurbeln, bedeuten Probleme in Bezug auf die Impfstoffabgabe und die Erosion des Arbeitsmarktes, dass die Fed großen Änderungen der Geldmarktpolitik Abstand nehmen wird.

Die Inflation wurde diskutiert, neben Komitee-Diskussionen zum Zurückfahren von Anlagerückkäufen, aber es scheint keine Anzeichen dafür zu geben, dass die Zinsen in naher Zukunft steigen könnten – selbst wenn die Arbeitslosigkeit auf einen Wert sinkt, der normalerweise Anlass zur Beunruhigung geben würde.

Janet Yellen ist eines der neuen Gesichter bei der FOMC und übernimmt die Rolle des Schatzkanzlers. Neil Wilson, unser Chief Market Analyst, sieht Raum für eine einheitliche steuerliche und geldmarktpolitische Strukturdynamik, der mit Yellens Berufung ins Spiel gekommen ist. Ist der Wechsel Richtung Modern Monetary Theory auf dem Weg?

PMIs – was sind die Aussichten?

PMI-Zahlen für Großbritannien, die USA und Europa werden auch nächste Veröffentlicht, was weitere Gesundheitsindikatoren für die Wirtschaft dieser Regionen liefert.

Für Europa sieht es nicht besonders gut aus. Der PMI von IHS Markit fiel von 49,1 Punkten im Dezember auf 47,5 Punkte im Januar, und entfernt sich somit weiter von den 50 Punkten, die auf ein anhaltendes Wachstum deuten. Könnte eine Rezession unterwegs sein? Der Unterschied zwischen den größten Volkswirtschaften der EU, Deutschland und Frankreich, zeigen unterschiedliche Signale. Die deutsche Industrie zum Beispiel, hilft mit steigenden Exporten Deutschland auf einem dünnen Wachstumskurs zu halten, aber Frankreich kann das nicht von sich behaupten.

Dennoch ist nicht alles in Ordnung. Der finale Produktions-PMI für Januar für IHS Markit fiel auf 54,8 von 55,2 im Dezember, obwohl er etwas über den ursprünglich geschätzten 54,7 lag.

„Die Produktion im verarbeitenden Gewerbe der Eurozone wuchs zu Beginn des Jahres 2021 weiterhin solide, obwohl sich das Wachstum auf den niedrigsten Stand seit Beginn der Erholung abgeschwächt hat, da neue Einschränkungen und Lieferengpässe die Produzenten in der gesamten Region vor weitere Herausforderungen stellen“, sagte Chris Williamson, IHS Markit, Chief Business Economist, gegenüber Reuters.

In Großbritannien fiel der Flash-PMI auf 40,6 im Januar, dem niedrigsten Stand seit 8 Monaten. Das ist weit unter dem von Reuters befragten Ökonomen vorhergesagtem Stand von 45,5 und der dritte Wert in Folge der unter 50 liegt. Obwohl die Impfkampagne eine der besten der Welt ist, bleibt Großbritannien im strengen Lockdown. Der Kampf mit sich verändernden Virusstämmen scheint nicht nur die Gesundheit des Landes zu belasten, sondern auch die Wirtschaft.

Die Produktions-PMI für Januar zeigen einen massiven Anstieg der Produktionsmenge in den USA. Der Produktions-PMI für die US-Fertigungsindustrie stieg von 57,1 im Dezember auf 59,1 in der ersten Januarhälfte, dem höchsten Stand seit Mai 2007. Ökonomen sind zuvor davon ausgegangen, dass der Index im frühen Januar auf 56,5 fallen würde. Kann sich der Trend fortsetzen?

 

Top Wirtschafts-Daten der Woche

Date  Time (GMT)  Currency  Event 
Wed Feb 17  7.00am  GBP  CPI y/y 
  1.30pm  USD  Core Retail Sales m/m 
  1.30pm  USD  Retail Sales m/m 
  1.30pm  USD  Core PPI m/m 
  1.30pm  USD  PPI m/m 
  7.00pm  USD  FOMC Meeting Minutes 
       
Thu Feb 18  1.30pm  USD  Unemployment claims 
  3.30pm  USD  Natural Gas Inventories 
  4.00pm  USD  Crude Oil Inventories 
       
Fri Feb 19  7.00am  GBP  Retail Sales m/m 
  8.15am  EUR  French Flash Services PMI 
  8.15am  EUR  French Flash Manufacturing PMI 
  8.30am  EUR  German Flash Manufacturing PMI 
  8.30am  EUR  German Flash Services PMI 
  9.00am  EUR  Flash Manufacturing PMI 
  9.00am  EUR  Flash Services PMI 
  9.30am  GBP  Flash Manufacturing PMI 
  9.30am  GBP  Flash Services PMI 
  1.30pm  CAD  Core Retail Sales m/m 
  1.30pm  CAD  Retail Sales m/m 
  2.45pm  USD  Flash Manufacturing PMI 
  2.45pm  USD  Flash Services PMI 

 

Top Geschäftsberichte diese Woche

Data  Company  Event 
Mon 15 Feb  BHP Billiton  Q2 2021 Earnings 
  Michelin  Q4 2020 Earnings 
  Liberty Global  Q4 2020 Earnings 
     
Tue 16 Feb  CVS Health  Q4 2020 Earnings 
  Palantir   Q4 2020 Earnings 
  AIG  Q4 2020 Earnings 
  Yandex  Q4 2020 Earnings 
  Bridgestone  Q4 2020 Earnings 
  Poste Italiane  Q4 2020 Earnings 
     
Wed 17 Feb  Shopify  Q4 2020 Earnings 
  Rio Tinto  Q4 2020 Earnings 
  BAT  Q4 2020 Earnings 
  Novatek  Q4 2020 Earnings 
  Hilton  Q4 2020 Earnings 
  Schindler  Q4 2020 Earnings 
  Garmin  Q4 2020 Earnings 
     
     
Thu 18 Feb  Walmart  Q4 2021 Earnings 
  Airbus  Q4 2020 Earnings 
  Daimler   Q4 2020 Earnings 
  Barrick Gold  Q4 2020 Earnings 
  EDF  Q4 2020 Earnings 
  Carrefour  Q4 2020 Earnings 
     
Fri 19 Feb  Hermés  Q4 2020 Earnings 
  Danone  Q4 2020 Earnings 
  RBS  Q4 2020 Earnings 
  Renault  Q4 2020 Earnings 

 

 

Risk on, dollar lower

  • Risk sentiment buoyed by Fed, stimulus hopes
  • Dollar sinks to fresh lows
  • Priti Patel says UK and EU in ‘tunnel’ negotiations

Solid start: market sentiment appears buoyed by hopes US lawmakers can strike a stimulus deal and Brexit talks are close to a breakthrough, albeit they are still hanging by a thread and the deadline is only two weeks away. European equities traded higher on Thursday, while US futures rallied and looked to open at record highs after the Fed signalled it will stand by the economy and keep the cash taps on.

The Fed will continue to buy $120bn of bonds until “substantial further progress has been made toward the Committee’s maximum employment and price stability goals”. This could be taken as a fairly hawkish statement, signalling the Fed’s readiness to slow the pace of asset purchases as soon as perhaps the middle of next year, by which time policymakers think people will be comfortable heading out. Moreover, the Fed did not expand asset purchases as some had called for, nor did it shift the focus of asset purchases to longer dated debt. However, Fed chair Jay Powell insisted that the Fed would do more if needed and suggested any inflation next year would be transitory. On the whole, this remains a very dovish bias, but policymakers upgraded their near-term economic forecasts. Markets were not unduly responsive to the statement, with the 10-year Treasury holding within the 0.925%-0.95% zone.

US lawmakers are moving close to agreeing a $900bn Covid relief bill that could include $600 stimulus cheques and extended unemployment benefits. Both sides are sounding a lot more optimistic, but there is still some haggling over the finer details to be done before it is signed off.

Home secretary Priti Patel said the UK and EU were in tunnel negotiations. It’s not quite the breakthrough moment we’ve been waiting for since they’ve been some form of last-ditch closed-door talks for weeks. The pound traded higher.

Sterling advanced to make new highs vs the dollar amid swirling reports of progress and deadlock on the Brexit front, however the move seems to be more linked to dollar weakness than a new bout of pound strength. The dollar index broke down to its lowest since Apr 2018 under 90. This helped GBPUSD move clear of its recent highs at 1.3540 to 1.35850 this morning.

The Bank of England meets later and should signal it’s prepared to do more should financial conditions deteriorate in the New Year. The MPC voted through an additional £150bn in QE in November is not in a rush to pull any more strings just yet, particularly given the Brexit uncertainty. Any talk of negative rates will be jumped on by the market, but this should be a fairly quiet affair.

Crude oil prices rose after a big draw on US inventories lifted sentiment and reduced fears of a build-up of stocks ahead of the Christmas period. The draw of 3.15m barrels compared with a huge 15m build in the previous week. Gasoline inventories rose by 1m barrels, but this was less than expected. WTI (Jan) kicked on after the release and moved above $48 where it has held gains.

Morning Note: Powell pulls rate cut rug from equities, Europe to open lower

Is the US economy running hot or not? The economy is growing at +3%, but inflation isn’t there. PMIs are softening, but the labour market is as tight as it can be. The yield curve has started to steepen again – the big recession indicator has dimmed. 

For the Fed, the glass is half full, still. That means it sees no need to cut rates this year – markets have been pricing in a 65% chance of a cut before 2019 is out. Now they need to rethink this. As I’ve been saying for some time, the market was mis-pricing where the Fed sits on the economy and inflation and was overly dovish.

Jay Powell last night made it clear the Fed thinks that the low inflation is down to ‘transitory’ factors. This word was key, and has given risk assets a bit of a fright. The Fed’s preferred gauge of core inflation has slipped from around 2% to 1.6% in recent months, but policymakers remain relaxed. If weaker inflation persists, however, the Fed may need to consider a cut.

The S&P 500 beat a hasty retreat on Powell’s comments – slipping 0.75% on the day to close at 2,923.73. Bonds were sold and yields climbed. Powell is not listening to Donald Trump and his 1% cut + QE idiocy.  

Why the market is surprised by the commentary from Powell is not really clear. The minutes from the last meeting showed sill that the bias remains mildly towards tightening – I.e. the way policymakers read the economy progressing suggests still another hike before a cut. The market is still not pricing in the chances of a rate hike this year. 

The word ‘transitory’ has done the damage – once again Powell has found a way to make what should have been a fairly innocuous presser quite interesting.  

European markets are seen lower on the open – taking their cue from Wall Street and its risk-off moves. The FTSE 100 is seen opening around 7357, while the DAX – coming back from the May Day holiday – is seen at 12,347 on the open.

The dollar managed to pare losses as Powell’s comments were digested. EURUSD gave up the 1.12 handle and remains below this in early morning trade.  

Having rallied as high as 1.31 at one brief moment ahead of the Fed statement, GBPUSD has retreated to 1.3050. Lots of strong horizontal support now around 1.3030/40.”

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  • Schutz vor Negativsaldo
  • Versicherung mit 1.000.000 $ Deckungsbetrag**

Markets.com, betrieben von Finalto (Australia) Pty Limited Hat bei den Australian Financial Services die Lizenznummer 424008 und wird von der Australian Securities and Investments Commission („ASIC“) reguliert”).

Nach der Auswahl einer dieser Regulierungsstellen werden die entsprechenden Informationen auf der gesamten Website angezeigt. Wenn Sie möchten, dass die Informationen einer anderen Regulierungsstelle angezeigt werden, wählen Sie diese bitte aus. Für weitere Informationen bitte hier klicken.

**Es gelten Allgemeine Geschäftsbedingungen. Siehe Police zu weiteren Einzelheiten.

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