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Markets Hopeful 

Stocks rose in early trade in Europe as they continue to mark time following a so-so session on Wall Street left the major averages barely changed. Shares in Hong Kong rose 2% after reopening following the 5-day weekend, helping to lift Asian shares outside Japan to a new 7-month high. The market is still hopeful the Federal Reserve will slow and stop in the next two meetings but are geared to be disappointed too – GDP data today will help shape that opinion further.   

BoC pivot: the Bank of Canada hiked but is now on pause and sounded more dovish, saying risks to inflation now balanced, expects 3% this year and return to 2% in 2024. Meanwhile the Japanese 10yr government bond yield inched closer to the BoJ’s 0.5% target, up to 0.476% this morning. The dollar continues to push the lower bound with EURUSD above 1.09 and GBPUSD back north of 1.24, whilst the yen sits around the 130 area ahead of Tokyo inflation data tonight.  

  

Mixed Earnings 

Earnings have been pretty mixed. Boeing reported a loss but free cash flow positive for the first time in four years. Losses widened to $3.5 billion for 2022 but first annual positive cash flow since 2018 on stronger commercial deliveries. Net losses rose to a mighty $5bn but it generated $3.1bn in free cash in the final quarter, as revenues jumped a third to $20bn.  

  

Long on Elon? 

Tesla surpassed earnings expectations with revenues rising 33% to $24.3bn. “Demand so far year-to-date is strongest in our history,” CEO Elon Musk said in a call. “Price changes really make a difference.” Net profit for the quarter rose to $3.69bn, or $1.07 per share, compared with $2.32bn, or 68 cents per share, a year ago. However, gross margins declined almost five percentage points to 25.9%, the lowest level in five quarters, Operating cash flow declined 29% year-on-year, or 36% from last quarter, to $3.28bn. The company guided for 1.8m sales this year – Musk citing “some friggin’ force majeure thing that happens somewhere on Earth” as the reason for the caution.   

  

US GDP Today 

Expectations for fourth quarter growth have moved around a fair bit, with notable weakness in retail sales and industrial production last week suggesting the US economy rather limped over the finish line in 2022. The Atlanta Fed’s GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2022 is 3.5%. Market estimates are for a weaker sub 2% level of growth. Although the data is, by definition, backward looking, the extent to which Q4 growth holds up will be an important lens through which to look at current forecasts for the coming quarters. It’s also important to remember from a trading perspective that we appear to have moved into a bad news is bad news period. Essentially this is all about soft landing vs hard landing narrative for the market.  

  

BOJ Eases Financial Conditions Globally 

Global liquidity is being helped by the Bank of Japan, which may explain something of the rally we have seen this year. Financial conditions are loosening as inflation recedes. The BBG Financial Conditions Index is now back to where it was in February 2022, when the fed funds rate was 0. Here’s the Chicago Fed financial conditions index set against CPI inflation. 

  

  

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