US EARLY MORNING: Stocks are on the front foot ahead of a big week for macro releases, which includes ISM, FOMC minutes and NFP

SNAPSHOT: US equity futures are trading higher, European equities opened on the front foot, while China stocks edged out gains despite soft manufacturing surveys. Treasuries are green, with yields lower by between 4-7bps (belly outperforms), given a boost in sympathy with German bunds. The Dollar Index is rallying broadly amid EUR weakness, perhaps due to German regional inflation metrics easing in December, which could suggest the mainland-wide measures (due later today) and the Eurozone aggregate data (due Friday) will show similar softness; additionally, there are many warnings on global growth (IMF’s Georgieva notably in recent days), which all may be helping the buck rally despite lower yields. The dollar’s near-term fate will be shaped by this week’s data releases, which come by way of the ISM reports, jobs data as well as Fed minutes. We preview this week’s major US events below.

HAPPY NEW YEAR: Welcome back! The S&P 500 closed 2022 with losses of 19.4%, the Nasdaq Comp fell by 33.1%, while the Dow lost 8.8%. According to a Reuters poll conducted late last year, analysts expect the S&P 500 to end 2023 at 4,200 (around 9.4% higher vs last week’s close). Bank of America’s analysts have warned that stock market performance could begin the year on a rough footing with a mild recession in the first half of the year, but could end up closing out the year in recovery mode as the Fed eases the hawkishness amid the growth slowdown (BofA is below consensus in looking for the S&P to end the year at 4,000). Analysts note that the Fed’s policy function will continue to be determined by progress in lowering inflation; the last couple of PCE inflation reports have showed some progress here, and many are hoping that this will continue in the coming months, which will give the central bank cover to again downshift its increment of rate hikes, possibly at the February meeting; the market currently prices the Federal Funds Rate target will be lifted from the current 4.25-4.50% to a peak between 4.75-5.00% in March, where it will remain until the latter months of 2023, when the market expects the Fed to begin cutting rates. For US Treasuries, 2022 was the worst year on record as the Fed hiked rates aggressively to tackle inflationary pressures. Barron’s notes that for fixed income investors, the situation is better than it has been for much of the last decade, with yields of just under 4% for 10yr Treasuries, muni yields between 3-5%, junk yielding between 8-9%, and yields of between 6-8% for preferred stock (pipeline operators yield between 5-9%, telecoms operators are yielding around 6%, real estate investment trusts are yielding 4%, utilities are yielding around 3%, as are a number of other dividend-paying companies, including big banks); investors finally stand to earn positive inflation-adjusted returns, assuming the consumer price index continues its retreat from the 8% reading prevailing at mid-year, the publication writes. Barron’s says that the poor performance of fixed income in 2022 has prompted many investors to question the value of bonds in portfolios, and the wisdom of the traditional 60/40 portfolio split of stocks and bonds; “but looking backward is the wrong way to approach bond investing,” it writes, adding that “the outlook has rarely been better [for bonds] in the past decade.”

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03 Jan 2023 - 09:30- Fixed IncomeData- Source: Newsquawk

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