January 16, 2023 | March Rate Cut Expectations

MARKETS

S&P 500: Down -24 points to 4760, VIX: 13.71

Asia: Japan -0.79%, China +0.27%, Hong Kong -2.16% Europe: Euro Stoxx 50 -0.17%, FTSE -0.35%, DAX -0.27%

FX: USD (DXY) up 0.77%, EUR down 0.68%, GBP down 0.56%, JPY down 0.81%, CNY down 0.28%

Energy: WTI Crude down 0.85% to $72.06, Brent down 0.20% to $77.96

Cross markets: Terminal rate unch at 5.33%, Implied rate cuts 2-years from terminal up ~26bp at 234bp, 5/10 yield spread +11bp

Treasuries: 2-year yields up ~8.6bp at 4.232%, 10-year yields up ~10bp at 4.041%, 30-year yields up ~10.7bp at 4.283%

WHAT WE'RE THINKING

Snapshot: US equities are mostly lower, but off worst levels after major indices posted small gains last week.? Tech is the upside standout with AI-levered names outperforming. All other indices retreat with REITS and Consumer Discretionary holding up relatively well.? BA is the weakest stock in the S&P 500 (SPX) as ongoing concern with the 737 MAX weigh on shares, while DAL extends earnings related downside from Friday. Financials underperform with MS and PNC lower after reporting earnings this morning. Treasury yields are higher with curve steepening after yields moved lower last week. The dollar is firmer vs. major currencies with the DXY up +75bp this morning. Gold is down ~1% on dollar strength, copper ticks higher and crude prices are little changed.

• Today’s backup in bond yields follows central banker pushback against aggressive rate cut expectations. This comes from weekend reports covering aggregate Fed rhetoric from the week and morning commentary from ECB officials.
• Today’s data tells a different story with the January NY Fed manufacturing survey coming in extremely weak, falling to -43.7 from -14.5 in December and below expectations for -5. This was the lowest NY Fed number seen in years, outside of post-lockdown Covid prints, and below levels from the ’08 financial crisis. New orders and shipments posted sharp declines, while unfilled orders continued to shrink and delivery times continued to shorten.
• Tomorrow’s release of December retail sales and Fed Beige Book are expected to offer more clarity on the economy.??
• Fed Governor Waller wrapped up a speech moments ago. The text actually reads dovish with Waller noting the Fed is within striking distance of its inflation target, while cautioning against overtightening. The pushback against rate cut assumptions came from his advocacy for a slow, steady series of rate reductions as opposed to the aggressive easing that happened in prior cycles. Waller is one of the more influential Fed officials from a markets perspective, but the dovish tilt in today’s speech seems to be missed with 2-year Treasury yields ticking higher. Instead, the focus remains on Bostic’s comments from Friday when he noted slowing disinflation momentum and the potential for an unexpected fiscal boost if US lawmakers pass a proposed deal that includes $70B in tax cuts.
• Market-based probability for a March rate cut has ticked down from 70% late last week to 66% today.??
• China surprised markets Sunday evening by leaving its Medium-Term Lending Facility (MLF) rate unchanged at 2.5% vs. expectations for a 10bp cut to 2.4%. Reports suggest the government recently told some institutional investors not to sell stocks as it works to stabilize markets through its sovereign wealth fund. Reports also speculate that China could soon deliver $139B of stimulus through a ‘special sovereign bond plan.’??
• Shares of GS trade higher after a pre-open earnings beat. MS also reported a small earnings beat with downside reflecting the large contribution from one-time items. It’s otherwise quiet on the earnings front with IBKR the only report scheduled for the afternoon. CQ4 earnings season begins to ramp tomorrow with reports from CFG, PLD, SCHW and USB due before the open.

Chartist: The near-term ceiling on the SPX is ~4,800 pending new information The index remains remarkably resilient, but a break below 4695 would confirm a near-term trend reversal in our opinion. The SPX tends to experience a brief period of mean reversion following periods of outsized short covering??Late-November kicked off a massive short-covering rally and we wouldn’t be surprised by a ~5% pullback in the SPX from current levels. This suggests a pullback to ~4540, which lines up with a series of medium-term support levels in the 4500-4535 range??The ‘new information’ to take the SPX through ~4800 would likely come from increased rate cut expectations or materially higher earnings estimates. Those two catalysts aren’t necessarily at odds with each other, but it's difficult to imagine both firing simultaneously.? Increased rate cut expectations would follow disappointing data, which would likely result in downside revisions to estimates.

Data: Upside in the SPX seems to depend on lower bond yields, and we’re unlikely to see another leg lower in yields unless growth data deteriorates from current levels. Survey data tends to lead official government data by 2-3 months and today’s NY Fed manufacturing survey is the second shockingly weak report after December services ISM hit on January 5. Recall that December services ISM missed consensus by 2 points with the employment component falling to 43.3 from 50.7 in November. Whatever downside in yields from slowing growth needs will partially be offset by increased Treasury issuance that is expected to nearly double to $2T in ’24.?

Rate cuts: Pricing of a March rate cut will likely be challenged in coming weeks. December Core PCE (reported on 1/26) is expected to decline to +1.9% YoY over the past six months. Core PCE may be the Fed’s preferred inflation measure, but policymakers are unlikely to overlook core CPI that’s tracking +3.2% YoY over the past 6 months. Notwithstanding a sharp deterioration in growth data, we’d expect the first rate cut to happen in June.

Your feedback is always appreciated and we’re around if you want to follow up on anything or run through any themes. –Andrew Book a call

FACT OF THE DAY

Justin Bieber was banned from China in 2017 because ‘his inappropriate manner has caused public discontent. In order to regulate the market order of show business in China and purify the market environment, it was decided that performers of inappropriate behavior will not be welcomed.’

WHAT WE'RE DOING

When does bad news become bad again? A meaningful slowdown in job creation over the coming months would likely flip the ‘bad-news-is-good’ for equities script. ?Pricing in an economic slowdown or recession would weigh on deep cyclical and small cap stock valuations, making for an attractive entry point. Read on CNBC

Money Life: Andrew speaks with Chuck Jaffe about the emerging Goldilocks theme, AI beneficiaries and a lightening round featuring APD, MRO, AMT and C. Listen to the Market Call at 32:33

Alphabet stock falls after cloud revenue misses: Speaking on an earnings panel, Andrew discusses key takeaways from Alphabet’s Q3’23 earnings report. He highlights pressure on the NYSE FANG+ Index with overcrowding in Magnificent Seven names like GOOGL. Watch on Schwab Network

See more of JSC in the Media.

THIS DAY IN HISTORY

January 16, 1966: Chicago is granted an NBA franchise to be called the Bulls; become the 3rd NBA franchise in the city, after the Chicago Stags (1946–50) and Chicago Packers/Zephyrs (now Washington Wizards).

CATALYST CALENDAR

Tomorrow: 1) US retail sales for December; 2) UK CPI for December; 3) US import/export prices for December; 4) US industrial/manufacturing production for December; 5) US NAHB housing index for January; 6) Fed’s Beige Book; 7) Earnings before the open: CFG, PLD, SCHW, USB; 8) Earnings after the close: AA, BHP, DFS, FUL, KMI, SNV, WTFC

Thursday: 1)Eurozone auto registrations for December; 2) ECB meeting minutes; 3) US building permits and housing starts for December; 4) The US Philadelphia Fed index for January; 5) US weekly jobless claims; 6) Japan national CPI for December; 7) Earnings before the open: CBSH, FAST, FHN, KEY, MTB, NTRS, TCBI, TFC, TSM; 8) Earnings after the close: JBHT, OZK, PPG

Friday: 1) Michigan confidence index for January; 2) US existing home sales for December; 3) German PPI for December; 4) US fiscal deadline; 5) Earnings before the open ALLY, CMA, FITB, HBAN, RF, SLB, STT, TRV

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