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Solid start to trade in Europe on Monday morning after a rip-roaring close for Wall Street on Friday, repairing some damage done last week. Shares in Frankfurt +1.5% in early trade, London +0.3% with the FTSE 100 trying to recover 7,500, the futures trying to recapture the 200-day moving average…still on to be about the only major index to end the month higher – energy and value has been a safer bet in Jan 2022 than tech and growth. Rates steady enough this morning, with US 10s around the 1.78% mark, gold muted under $1,800 and the dollar easing back after Friday’s fresh cycle highs.

Wall Street shares leapt on Friday having opened lower; the S&P 500 rallied two-and-a-half percent, the Nasdaq up more than three per cent. It was strong finish to a wildly volatile week. Doubt is whether the correction swing low is in yet, the longer we stay above 4,222 for the broad market the more you think the market will consider the correction done and move on to a positive grind higher with focus on earnings/fundamentals. Tantrums are usually on the threat, not on the deed: market knows the Fed is tightening swiftly this year and possibly every meeting. Retest of this area would be a catalyst for further volatility. Despite the Friday bounce the S&P 500 is still set for its worst month since March 2020, down 7% MTD. The Nasdaq is –12% in January, the Dow Jones – 4.4%. Smalls cap Russell 2k is off by 12.7% in January. Growth vs value – no contest: the iShares S&P 500 Value ETF (IVE) is down 4% YTD vs a drop of almost 14% for the iShares S&P 500 Growth ETF (IVW).

 

Atlanta Fed President Raphael Bostic told the FT over the weekend it could be appropriate to raise rates by 50bps…hawkish but he usually is. The market is still working out whether the Fed will hike 3 or 8 times this year. Not a heck of a lot of data today…so far German inflation figures point to high print at a national level, above the -0.4% month-on-month decline, year-on-year falling to 4.7% from 5.7%, that was expected. More pressure on the European Central Bank as hawks circle? Chicago PMI and FOMC member George on tap today. Key ISM and NFP reports for the US due later this week.

 

Data out Friday suggested inflation is not going away…US PCE inflation jumped to 5.8%, a 40-year high, while core PCE inflation rose to 4.9%, +0.5% month-on-month. The rise in the PCE was higher than economists expected but could start to peak around 5.4% in the next couple of months. A welcome development for the Fed is slowing wage growth, as personal income rose 0.3% for the month, a touch lower than the 0.4% estimate, and down from the +0.5% in November. Spending fell the most since Feb, just as the retail sales indicated. Not a super-growth roaring economy story but higher inflation pressing on spending + growth. Michigan consumer sentiment bit lower, inflation expectations a bit higher.

 

The Bank of England this week is likely to raise interest rates. The labour market remains tight, growth largely unaffected by omicron. Goldman Sachs are out with a call for 3 25bps hikes this year, would be the biggest tightening cycle in a long while. New MPC member Catherine Mann said in her first speech recently: “I know that there has been a lot of talk already about the cost-of-living squeeze. And to be clear, it is not my goal to make this worse than it already is – to the contrary, I aim to bring inflation back down to target such that workers can enjoy real wage gains from their labour.” Should we welcome a political element to the MPC’s decision making? The European Central Bank is also in action…does it buckle to pressure as inflation builds? I think we get to see whether the hawks or doves are in the ascendancy. 

 

Oil is just a tad below the multi-year highs set on Friday, with Brent around $90 and WTI at $87…focus is on Ukrainian situation and UN Security Council meeting this week. OPEC+ is due to meet on Wednesday and stick to planned production increase. 

 

Earnings this week are focused on Big Tech: Alphabet, Facebook, Amazon….Metaverse, cloud, stay-at-home trends…

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