US EARLY MORNING: Equity futures are higher but remain in bear territory; speculation rises that the Fed will consider a 75bps rate hike

SNAPSHOT: After the benchmark S&P 500 closed in a technical bear on Monday, US equity futures are trading with gains this morning, but remain in bear territory (for the ES, the bear market line is 3846.6). NQ +1.4%, ES +1.2%, RTY +1.1%, YM +0.9%. The VIX is lower by just over a vol at 33.0. Treasuries are rallying by between 2-9bps, with most of the outperformance in the belly, while major curve spreads are bull steepening, a reprieve from the aggressive flattening seen in wake of Friday’s CPI data. The 2s10s part of the curve stands at around 3bps, just exiting the inversion it fell into again on Monday. For some context, Bank of America’s latest Fund Manager Survey notes that the S&P 500 has now officially entered its twentieth bear market in the last 140 years. The bank points out that the average peak to trough of the bear decline has been 37.3% and has lasted an average 289 days. “History is no guide to future performance but if it were, today’s bear market would end on October 19th, 2022, with the S&P 500 at 3,000; on a more positive note, for next bull market average duration is 64 months with 198% return.” Intriguingly, the survey also notes that fund managers see the top three tail risks (in order) as 1) hawkish central banks, 2) global recession, and then 3) inflation.

FED: The apparent stability in equities this morning comes in wake of multiple reports on Monday (see Axios, Bloomberg, NYT, and WSJ) that the Fed was likely to consider a 75bps rate rise this week vs the 50bps rate hike that officials guided to before they went into the pre-meeting blackout period. As Bloomberg’s venerable commentator John Authers notes that none of these reports have any on-the-record quotes from Fed officials, but instead seem to be framing recent commentary from officials in the context that the central bank has room to move by 75bps. Authers says, “we can assume that this was a coordinated attempt to guide the market through trusted journalists, while just about staying in purdah,” adding that “this is one of those times when you can believe what you read in the papers.” In fact, the folks at Goldman Sachs have updated their Fed call, and now projects that the FOMC will move rates higher by 75bps tomorrow – their rationale is the same as Authers. With a specific reference to the WSJ article, Goldman writes that it was “a departure from another article that [author] Nick Timiraos published [on Sunday] that characterised such a move as ‘unlikely’,” and adds “our best guess is therefore that the article is a hint from the Fed leadership that a 75bp rate hike is coming at the June FOMC meeting on Wednesday.”

KOLANOVIC IS STILL BULLISH: Analysts note that given equities have been pressured recently due to fears of surging consumer prices, signals that the world’s most important central bank was becoming even more aggressive to cap consumer prices was welcome news. The idea is that lower inflation helps to protect the real value of company’s future income streams, but some remind us that if the Fed became too aggressive, lifting rates above neutral and into restrictive territory–as it has threatened to do if the data demands–then lower levels of activity may become a detriment to corporates’ earnings ahead. JPMorgan strategist Marko Kolanovic – who has been super bullish on equities amid their recent slide – thinks the US will avoid a recession, re-emphasising his recent arguments that consumer strength, Covid reopening and recovery, as well as policy stimulus in China will provide support. Kolanovic also said “Friday’s strong CPI print that led to a surge in yields, along with the sell-off in crypto over the weekend, are weighing on investor sentiment and driving the market lower,” adding “however, we believe rates market repricing went too far and the Fed will surprise dovishly relative to what is now priced into the curve.” For the sake of fairness, it may be worth noting that Kolanovic’s note was published before the latest developments. His position also differs from that of the JPM chief US economist Michael Feroli, who does look for a 75bps; Kolanovic has also differed from his boss Jamie Dimon on the prospects of the US and global economy, as has been heavily reported recently.

DAY AHEAD: There is key ECB speak due today from the ECB’s Schnabel, and traders will be on the lookout for any details about the fragmentation plan the central bank is formulating, although reports seem to suggest that the ECB wants to be coy with the details. The US day will feature IBD/TIPP economic optimism, which will be in sharp focus after the University of Michigan’s gauge of consumer sentiment slumped to a record low in June; the US day will also see the release of PPI data for May – we already know consumer prices surged to a 40yr high in the month, and this may be reflected in today’s data too – while some have played down the link between PPI and CPI, it still may offer insight into how corporate margins will be impacted. After the bell, the API will release its private inventory report for the week. Full Day ahead here.

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14 Jun 2022 - 09:25- EquitiesResearch Sheet- Source: Newsquawk

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