Jan 18th Morning Note
Firm start for US markets despite fresh geopolitical concerns
The S&P 500 bottomed at 4716 in yesterday’s session, as growth/tech stocks weighed on US indices due to higher US yields. The index recovered to 4740 over the NY afternoon despite the 20y reopening auction disappointment. Nasdaq Composite and S&P 500 each closed about -0.6% lower on the day, after seeing losses of more than 1% at the lows.
This morning markets are modestly higher with S&P futures and Nasdaq futures up 0.5% and 0.9%, respectively. Europe is also trading higher after Cartier owner Richemont reported a sales surge in China, boosting its shares. This was a relief for the market as Burberry missed expectations and blamed a worsening slowdown in demand for luxury goods when it issued a profit warning last week. In Asia, we saw a modest uptick in Hang Sang and Shanghai comp as markets stabilized after yesterday’s slump.
In US data, retail sales surprised to the upside in December. They reminded that the US consumer remains resilient and, increased the risk of later rate cuts than expected by the market. Fed implied rates keep March on the table but price only 53% chance of a cut (vs 100% chance last week). We also got housing data: weekly mortgage applications accelerated, but New Tenant Rent index plunged.
This morning, the US weekly jobless claims unexpectedly dropped last week to a 16-month low (187k vs expected 207k), underscoring the resilience of the labor market to start the year. Construction of new homes in the US fell for the first time in four months in December, dragged down by a drop in single-family home building. The Philadelphia Fed Manufacturing Index in the US rose 2.2 points to -10.6 in January 2024 from -12.8 in the prior month but worse than market estimates of -7. This is the index’s 18th negative reading in the past 20 months. The indexes for current new orders and current shipments both also rose in January but remained negative.
Geopolitical Risks Growing
Not much macro news overnight, apart from fresh escalation in the Middle East with Pakistan carrying out targeted strikes today against Iran after the latter struck against a separatist group in Pakistan on Wednesday. Official language so far suggests a desire to de-escalate. Note that both Iran and Pakistan are strong allies of China, so we could expect Beijing to try to mediate the situation too.
Overall, geopolitical risks are contained so far, but a potential escalation between Israel and Hezbollah amid the evolving Red Sea situation could lead to tail risks for the markets.
Other news:
The risk of premature central bank celebrations on inflation (FT)
Solid US retail sales give economy a boost heading into 2024 (Rtrs)
US manufacturing output ekes out small gain in December (Rtrs)
Choose your inflation carefully (FT)
Fed’s Bank Capital Plan Needs Substantive Changes, Bowman Says (BBG)
Have No Fear of the Fed’s $7 Trillion Stash (Bill Dudley op-ed)
US natural gas demand hits record high amid severe cold snap (Rtrs)
Central Banks Say Not So Fast To Rate Cut Bets (WSJ)
Rating agency points to further pain after surge in corporate defaults (FT)
Cleveland Fed forecasts headline CPI to drop to 2.96%, lowest since March 2021 (Fed)
Fed Beige Book Finds Looser Labor markets and Narrower Profit Margins (Fed)