Market Summary Report Thursday 12th January 2023

BY?DURAID OKASHA?

US CPI readings confirm inflation on downward path and lift risk assets; earnings season starts tomorrow

Headline CPI monthly reading came out as expected registering a decline of 0.1%, and so did the other three readings, headline and core, as shown in the table above. The initial stock market reaction was a big dive as there were some who were expecting, or at least hoping, for even a softer CPI that would set the Fed firmly on a pivot course. But then, the market looked at the glass half full, and decided that the price trend is firmly down, be it slower than than they would have liked. The fall in the monthly prices marks the first time since May2020 that prices fell. President Joe Biden wasted no time in praising these data. “It all adds up to a real break for consumers, real breathing room for families and more proof that my economic plan is working,” he said. “We have more work to do, but we’re on the right track.” Nevertheless, the annual core CPI is well above the Fed’s 2% target rate. The Fed has vowed that it will keep rates high to bring inflation back to normal levels, I.e 2%. Durable goods saw a decrease in price rises, and so did non-durables (products with a lifespan of under three years). Food prices have remained uncomfortably high and inflation is still high within the services sector. The net effect on the US consumer has been to move down the quality scale. For example, people are spending money on grocery stores instead of dining out. Also, they are cutting down on travel plans.

2- After the release of the CPI, Philadelphia Federal Reserve President Patrick Harker crossed the wires saying: the Fed is likely to raise rates a few more times in 2023, and that he does not see a recession but GDP should slow to 1% this year. Also, the time of super-sized rate hikes has passed. Once hikes end, the Fed will need to hold steady for a bit. Core inflation is likely to moderate to 3.5% in 2023, hit Fed 2% target in 2025. Worst of inflation surge is now likely over. Labor market remains in excellent shape. Unemployment to fall back to 4% after rising this year. Unemployment likely to tick up to 4.5% this year from current 3.5%. Lastly, he said that he is concerned about the commercial real estate sector.

3- Notwithstanding Harper’s comments above, the market is now pricing a 93% chance of a quarter-point rate hike, according to the CME futures. That would bring rates up to a range of 4.5% to 4.75%. The market was pricing in a 77% likelihood of a 25 basis point hike yesterday. The bond, or rates, market has been in disagreement about the future path of the Fed’s rate hikes since the second half of last year. If history is any guide, it is the market that is usually proven right in the end!

4- One of Disney activist shareholders, Trian Fund Management, is fighting a proxy war with Disney to earn a seat on its board. The main point of contention is Disney’s acquisition of Fox back in 2019 for $71bln. Nelson Peltz, of Trian Fund Management, filed a preliminary proxy statement looking to place himself on Disney’s board. To counter this move, Disney announced that Mark Parker, the executive chairman of Nike would become the new chairman of the board, raising the board members to 11. Trian said it owns about 9.4 million shares valued at approximately $900 million, and that it wants Peltz to be on the board so he can get access to internal numbers and tell other members if they’re missing out on opportunities. Disney’s stock was up more than 4% today.

5- The earnings season kicks in tomorrow with big caps, especially banks, reporting earnings: JPMorgan, Wells Fargo, Bank of America, Blackrock, Citigroup, Bank of New York Mellon and UnitedHealth are among those reporting. These earnings reports will shed light on how Q4 earnings went, and, more importantly, the guidance going forward.

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US Treasuries:

Yields fell across the Treasury curve with no exception. The long end of the curve saw the biggest falls in yields, reflecting increasing fears of recession and anticipating a Fed pivot in the first half of the year, contrary to many Fed officials hawkish comments that the market seems to be ignoring, or at least viewing them as trying to talk financial conditions more restrictive. The benchmark 10-year bond yield fell over 11bps to 3.44%, while the more rate-sensitive 2-year note yield fell 9bps to 4.138%, thus taking the 10-2 yield spread to almost minus 70bps, a steepening from the last few days. The bond market is still pointing to a recession for the US economy, going by this metric alone.

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Foreign Exchange:

The US Dollar fell immediately after the release of the CPI data, indicating expectations of a softer Fed stance going forward. The dollar fell more than two percent against the Japanese Yen to Y129 level, a level not seen since May of last year, before recovering slightly to Y129.28. Against the Euro, it was a similar story, with the dollar falling sharply to $1.0865, a level not seen since April of last year, before recovering slightly to 108.45. Sterling was a bit of a laggard, and managed only a minor advance against the weak greenback, rising to $1.2236 before slipping back to 1.2205. With the Fed expected to raise rates by only 25bp in its upcoming meeting on January31 – February 1st, the interest rate differential that has propelled the US dollar higher is about to diminish.

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US equity markets:

After the initial dip in US stocks futures straight after the release of the CPI data, the US equity markets took its cue from the rates markets which showed a 93% odds of only a 25bps ratea hike at the next FOMC meeting. Also, the Fed’s Harper clearly indicated a preference for a 25bps rate hike. This comes after recent similar comments by Fed officials, taken as preparing the markets for a 25bps, rather than 50bps, rate hike.

The DJIA rose 222 points, or 0.7%, the S&P 500 rose 0.4%, while theNasdaq Composite rose 0.7%. Sector-wise, Energy, real estate and technology led the advance as rate hikes fears diminished, while defensive sectors utilities and consumer staples were laggards. Cap-wise, the small cap Russel 2000 index rose over 1.5%, and the mid-cap S&P400 rose 0.9%. Smaller companies are more exposed to the economic cycle and tend to be more amply affected by it and hence small cap stocks tend to outperform at the beginning of the economic cycle and underperform at the end of the cycle.

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Oil:

Oil rose slightly today, benefiting from a weaker dollar and lower US yields. Oil has been rising this week, and is close to make up the losses it suffered straight after the beginning of the year when buyers were in short supply. WTI January futures were last trading at $78.20 while Brent January futures were last trading at $83.82

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Gold:

Gold breached the $1,900 immediately after the release of the CPI data, on hopes that a soft CPI would hasten the Fed’s pivot and bring the US Dollar and US yields down, and hence make the precious metal more attractive. Still, gold had a good day today on the back of the weak greenback and lower US yields. It finished?the day at $1,897.65, a level not seen since May of last year. Technical for gold continue to be positive and point upwards.

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Cryptos:

Cryptocurrencies had an excellent day on the back of the soft US CPI. Bitcoin rose by almost 9% to trade at $19,065, Ethereum rose by almost 7% to trade at $1,435, Ripple was unchanged from yesterday, trading at $0.38 and Litecoin traded up over 3.5% at $85.82.