Jan 17th Morning Note
US Futures Extend Losses
Stocks are getting hard this morning - S&P and Nasdaq futures are down 40-60bps, while Russell 2000 is the primary laggard with a loss of ~1.1% pre-market open. Europe’s major indices are down 0.9-1.1% with most sectors underperforming. In Asia, Hang Sang dropped 3.7% and Shanghai Comp finished down 2.2%.
People who were worried about markets being ahead of itself are certainly getting their call right this week.
Three main reasons for the negativity this morning:
China data underwhelming - GDP miss (actual 5.2% vs. 5.3% expected), property investment, retail sales, and population decline accelerated. A relatively grim picture of China with stimulus measures falling short of expectations has led to Chinese equity indices falling by 5% Year-to-date.
UK CPI reaccelerated - the annual inflation rate in the UK unexpectedly rose to 4% in December 2023 from a nearly two-year low of 3.9% in November and above forecasts of 3.8%. It is the first increase in the inflation rate in ten months. The increase in inflation is a global phenomenon as we saw in the US, Canada, and EU, and now we are seeing it in the UK. The CPI deceleration process is not going to be linear, the broader trend is still for ongoing deflation but in December that was not the case.
Hawkish ECB and Fed rhetoric - Pushback from ECB officials on market expectations of rate cut pricing continued. Currently, the market is pricing in 20% odds of a March rate cut, but April move odds are nearly 100%. ECB President Lagarde noted that the central bank's first rate cuts are likely due in the summer, adding that more evidence of disinflation is needed to warrant looser policy. Also, Governing Council member Knot stated that markets have overestimated the extent projected of rate cuts, allowing for financial conditions to unintentionally loosen and risking the necessity of a hawkish response from the central bank.
In the case of the Fed, we will not only have rate cuts but also adjustments to QT. Waller was perceived to be hawkish yesterday, but his speech text was dovish. His main message was that the Fed may not cut rates as aggressively as the market expects. He emphasized the positive state of economic activity and labor markets, stating there's no urgency for rapid rate cuts. However, he also noted that he is ok with financial conditions easing, which is dovish. Overall, the theme for central banks this year is going to be monetary easing, but the size of it will depend on data, specifically inflation and growth.
US 10Y Bond Yield Hits 5-week High
Treasury yields in the US continued their upward march with 10Y up another ~5bps to 4.11%. Meanwhile, 2Y yields are up 10bps to 4.32% after Retail sales in the US soared 0.6% month-over-month in December 2023, following a 0.3% rise in November and beating forecasts of 0.4%. It is the biggest increase in three months, led by sales of autos (1.2%). Excluding autos, retail sales increased 0.4%. The data from today along with Waller’s comments from yesterday has led to the market repricing the March cuts odds to 58% now.
Oil Extends Fall as Strong Dollar Weighs
WTI crude futures fell below $72 per barrel on Wednesday, extending losses from the previous session as pressure from a stronger US dollar overshadowed concerns about escalating tensions in the Middle East. A stronger dollar makes greenback-denominated oil more expensive for buyers holding other currencies, hurting demand. Meanwhile, heightened tensions in the Middle East provided a floor to oil prices, as Houthi militants continued to disrupt Red Sea shipping. Many oil tankers have been avoiding the waterway and are forced to divert around southern Africa that takes 14 days longer.
Other news:
Apple overtakes Samsung as top seller of smartphones (RTRS)
China's population drops for second year, with record low birth rate (RTRS)
Bill to avert government shutdown advances in US Senate (RTRS)
The bill is coming due on a record amount of commercial real estate debt (WSJ)
Investors most overweight stocks in three years-survey (BBG)
Fed Can Cut Rates This Year Absent Inflation Rebound, Waller Says (BBG)