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Elon Musk asked his millions of Twitter followers whether he should step down as CEO of Twitter. I am not sure if I have a genuinely held opinion, but I voted anyway to see how this is going. Tesla shareholders would probably say he should step down. Tesla stock is down big since the purchase and keeps falling, hitting a new YTD low at $150 on Friday after Musk sold more last week. Musk has now offloaded something like $23bn in Tesla stock since the purchase. Here’s Wedbush “The nightmare of Musk owning Twitter has been an episode out of the Twilight Zone ... a train wreck situation ... We believe [that] more activism and growing investor frustration will force the Board of TSLA to confront some of these issues head on.” Using Tesla stock to fund Twitter whilst scaring off advertisers has not been a positive for Tesla stock. Given this is Musk, it may be that he has already had a tap on the shoulder from the board. At least Cathie Woods keepings loading up and doubling down by buying more TSLA for ARK funds. Meanwhile Musk is said to be seeking new funding for Twitter at...$54.20, the price he paid for it! Tesla shareholders would be appreciative, but I doubt any investor is going to be swayed to sign up to that deal. If he pulls that off he deserves to do with Twitter what he wishes. 

Central bank shift   

Last week seemed to mark a shift – the Fed and ECB basically turned round and said we don’t know what the terminal rate will be; we will keep going until something snaps. ECB’s de Guindos this morning outlining how it stands neatly by saying the CB ‘will hike rates further, we do not know when will stop’. It was the realisation that a peak in inflation is not a plateau and inflation will be higher and stickier for longer. This is the view I’ve had for a long while of course, but the CBs and markets starting to realise that there is an unspecified and unknown amount of tightening to come and, excepting the Bank of England, cuts next year are very unlikely. CBs are slowing the pace of rate hikes for sure, but if you don’t know where you are going it’s wiser to tread a little slower as you look for the off ramp. This implies a weak outlook for equities and bonds until we get some kind of resolution on where the terminal rate is going to be...and I don’t think this becomes clear until well into 2023. Meanwhile as stagflation drags on, we are heading for a real earnings recession.  

Stocks hit 

Stocks fell last week. The FTSE 100 closed Friday at a four-week low, testing its 200-day simple moving average. Stocks in Frankfurt and Paris also fell over the week as the ECB took a hawkish turn. The major European bourses are about 3% or so lower for the month of December. The S&P 500 declined 2% last week and is more than 5% lower for the month. The Nasdaq Composite index is more than 6.6% lower for December. Stocks this morning are a tad firmer in early trading. 

 Inflation due up 

After last week's lower-than-expected CPI inflation report, attention shifts to the Fed’s preferred inflation gauge at the end of this week. The personal consumption expenditures price index excluding food and energy – the so-called core PCE index - rose 0.2% in October, which was slightly below the estimate. The index increased 5% year over year, down from a rate of 5.2% in the prior month. Again, it comes down to how the market views the Fed’s reaction – lower inflation implies fewer rate hikes. Last week saw the stock market jump on lower-than-expected CPI inflation before dropping on the Fed’s hawkish higher-for-longer rhetoric. Ultimately the inflation plateau scenario means the key will lie not in what’s the reason to hike (inflation), but the reason not to (the labour market). So markets will increasingly look at jobs data as being the biggest driver of Fed policy next year – assuming inflation remains at reasonably elevated levels. 

Watch Italy 

Italian bonds are hurting – the 10yr BTP up 60bps last week from around 3.7% to 4.3% as of this morning. It was the biggest two-day move since Christine Lagarde’s ‘we’re not here to close the spreads’ remark. The question is whether the ECB has the cajones to see it through with the implied 100bps of hikes by March and see the Italian bond market potentially go berserk. Lagarde said four times: "Anybody who thinks that this is a pivot for the ECB is wrong". Italy is the key here. The TPI mechanism might be used soon – will it work? And will the new government work within its parameters?  

And Japan 

Meanwhile keep eyes on the yen with the Bank of Japan tomorrow and reports/rumours there will be a review of the Abe-era inflation (deflation) mandate. There has been a lot of speculation that the BoJ will adjust its ultra-loose policy by revising a joint statement the BoJ and Japanese government signed years ago that committed the CB to hitting 2%. 

Charts 

Friday’s 1% decline for the S&P 500 took it below the 3,900 level, an area of significance, as well as under its 50-day SMA. At the lows it touched the 61.8% retracement of the move off the August swing highs around 4,330 to the Oct low.

spoos Dec19th.png

The dollar made a big rejection move last week. This might signal the end of the near-term move lower for USD. A persistently higher for longer Fed and the prospect of weaker global growth and recession next year ought to be dollar supportive.

dxy dec19th.png

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