US EARLY MORNING: Index futures a little lower as traders return from long-weekend; bank earnings from GS and MS, Empire Fed and policymaker jawboning from Davos ahead

SNAPSHOT: US equity index futures are lower, though the ES is lingering around the psychological 4,000 level. The Nasdaq-100 is leading the downside as Treasury yields rise 5-6bps at the long-end of the curve. The Dollar Index is flat; the JPY is also flat as the BoJ starts its two-day policy meeting (our preview is here). Crude futures are mixed (note: there was no WTI settlement on Monday due to MLK holidays). Overnight, China activity data surprised to the upside, but this has not engineered any significant risk-on given the data is seen as backwards looking and policymakers have already announced stimulus measures to support the economy this year. In the UK, labour market data continues to tee up a 50bps BoE rate hike next month. The focus today will be on large bank earnings (MS and GS report), while the January Empire Fed report may offer clues as to whether the more widely followed ISM data will rebound in January following December’s tumble into contraction (at both the headline and new orders level). Fed’s Williams (voter) speaks later in the session. There will also be distractions from Davos, as global policymakers tell us what they have already told us in earlier speeches (for those who care, the schedule for the events can be accessed here).

BOFA GLOBAL FMS: Bank of America’s January survey notes that global fund managers were the most underweight on US equities since October 2005, and most bullish on the Eurozone EZ since February 2022. Allocators were overweight cash and bonds, and remained underweight global stocks, and had the biggest overweight in Emerging Markets since June 2021. Recession fears eased to a six-month low, while growth optimism was at a one-year peak. The survey suggests that inflation expectations have peaked, although higher CPI is still seen in the next 12-months. The USD was seen as the most overcrowded trade.

JPM STILL BEARISH: JPM’s strategists continue to tell clients that the current market rally will start fading through Q1. “The positive catalysts that we were highlighting from October ... are now in the open,” and warned that “potential curveballs could come from the Fed, politics, disinflation phase not progressing smoothly, weaker earnings, weaker capex and renewed rollover in activity momentum.” The bank notes that January still offers favourable seasonals, while positioning is supportive, but says investors should be using this window to reduce exposure. JPM says the market is behaving as if we were in an early cycle recovery phase, but points out that the Fed has not even concluded its hiking cycle yet. “Typically, [an early cycle recovery phase] is seen only after a period of Fed cuts, and we think the up move will hit an air-pocket, and end up looking premature.” JPM is sticking to its October call that bond yields have likely peaked, and will continue to inch lower in the first half of this year, along with further yield curve inversion as Fed has started hiking late, and could finish hiking late. “This suggests better performance of Defensives and Growth stocks tactically,” JPM says, and “within this, we stay bullish on Commodity equities – Mining and Energy, driven by USD peaking, China reopening, low inventories and still cheap valuations, despite the good run.” The bank says Cyclicals stocks appear to be pricing in the rebound in PMIs back to solid expansion territory in the first half of the year, “but our lead indicators point to more softness, PMIs are unlikely to sustainably advance in the near term,” adding that “flat/down PMIs are consistent with better performance of lower beta stocks.”

DAY AHEAD: The release of the Empire Fed Manufacturing survey for January will help inform expectations of the more widely followed ISM data (released February 1st), after the December ISMs for services and manufacturing both saw the headline and the forward-looking new orders components slump into contraction. Elsewhere, Canadian CPI data for December will help shape expectations for next week’s BoC meeting; Monday’s release of the Business Outlook survey showed near-term inflation expectations were still increasing amid a glum outlook. Today’s US corporate earnings docket includes financial heavyweights Goldman Sachs (GS) and Morgan Stanley (MS), while United Airlines (UAL) will also report. Elsewhere, policymaker’s annual back-patting fest that takes place at Davos is underway will see commentary from key officials including China Vice Premier Liu, German Vice Chancellor Habeck and Finance Minister Lindner, IEA’s chief Birol, IMF’s Gopinath. Fed’s Williams (voter) will also be speaking later in the session. Our full Day Ahead schedule can be accessed here.

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17 Jan 2023 - 09:20- Research Sheet- Source: Newsquawk

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