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.”

WEEK AHEAD HIGHLIGHTS:

• We hope you have rested-up over the Holiday period, because the first week back is going to be busy, and full of macro events.


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  ISM SURVEYS (WED, FRI): US ISM Manufacturing PMI (Wed) is expected to fall to 48.5 in December (prev. 49.0), while the ISM Services PMI is seen paring to 55.0 in December (prev. 56.5); Deutsche Bank says the reports will be most important in terms of gauging business sentiment around the labour market. "With respect to the employment component of the manufacturing ISM, the three-month trailing average of 49.0 points to a stall in manufacturing hiring, if not an outright contraction; conversely, the analogous data point in the services ISM, 51.2, points to still sturdy labour market demand in the non-manufacturing sector." Elsewhere, traders will be carefully monitoring the prices paid components to gauge the trends of slowing inflation.


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  FOMC MINUTES (WED): US FOMC Meeting Minutes (Wed) will give us some insight why the Fed ignored the soft November CPI data in favour of a hawkish policy announcement (looser financial conditions were likely to be the driving factor, as well as the need for further evidence of inflation slowing); analysts will also be looking to any commentary on the prospects for a US recession and a softening labour market, given that the central bank anticipates that it will still need to raise rates (of the nineteen participants, seventeen see the FFR target above 5.0% this year, which is above market expectations).


• 
  US JOBS REPORT (FRI): The main event is likely to be the US jobs report (Fri), which is expected to show 200k nonfarm payrolls were added to the economy in December (prev. 263k), with the unemployment rate remaining at 3.7% (the Fed expects the jobless rate will rise to 4.6% by the end of this year); the average hourly earnings data is expected to cool to 0.4% M/M (prev. 0.6%), while the annual measure is seen cooling to 5.0% (prev. 5.1%). Before the official jobs data, the November JOLTS report (Wed) is likely to show job openings easing to 10mln from 10.33mln (note: the official November payrolls data surprised to the upside), while the ADP's measure of payrolls (Thu) will do the usual mood-setting, despite many analysts remaining critical of the data series as a reliable signal for the official BLS data.


• 
  EARNINGS: On the earnings front, this week, numbers from CAG, LW, STZ, WBA are the highlights. Attention will begin shifting towards next week’s events, however, when the large US banks are scheduled to begin reporting Q4 numbers.


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  WASHINGTON (TUE): This week, we will also be eying events in Washington, where Republicans will take control of the House; the speaker vote has been set for Tuesday, and Kevin McCarthy is the top choice of most House Republicans, but is still working to win support from a small contingent within the GOP. He would need to secure support from most Republicans given the thin majority the party holds in the House. WSJ notes that the roll-call vote for speaker on the first day of a new Congress is often a formality, but how it will go when the House convenes on Tuesday is anyone's guess. McCarthy has reportedly offered a list of rule changes he was willing to make to empower rank and file lawmakers, including one that would make it easier for dissatisfied lawmakers to oust a speaker, the Journal wrote, although it was still unclear if it had brought enough detractors on board. The concessions being offered, along with the GOP's thin majority in the House, has led many to make the argument that McCarthy would be one of the weakest House leaders in a long time.


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  EUROZONE CPI (FRI): Elsewhere, US traders should still be mindful of the Eurozone flash December CPI data (Fri), which is seen cooling to 9.7% Y/Y from 10.1% in November; the ex-food and energy measure is seen easing to 6.5% Y/Y from 6.6%, while the super-core gauge is likely to be unchanged at 5.0% Y/Y.

MACRO:

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  Global Growth - IMF chief Georgieva said one-third of the global economy will be hit by recession this year, and 2023 will likely be tougher for the world economy than the previous 12 months, as the US, EU (where half of the bloc is likely to be in recession this year) and China all slow simultaneously; for the latter, the IMF thinks that rates of growth could cool to at or below the levels of global growth, which means it could drag the world’s economy lower rather than boosting it, which Georgieva says has never happened before. The IMF last cut its 2023 global growth forecasts in October, and Georgieva’s remarks suggest these could be cut again when it updates next at the World Economic Forum at Davos, scheduled to take place January 16-20th.


• 
  China Data - Over the weekend, data showed China’s official NBS manufacturing PMI dropping to 47.0 (exp. 48.0) in December from 48.0 in November, the largest monthly decline since the start of the pandemic in February 2020, and remaining below the neutral 50-mark for the third consecutive month. Reuters notes that the data gives the first glimpse of the manufacturing sector after China removed its COVID restrictions in early December. Meanwhile, the Caixin version of the manufacturing PMI declined to 49.0 in December (exp. 48.8, prev. 49.4). SocGen’s analysts note that news headlines over the holidays have been dominated by the surge in COVID infections and the growing list of overseas countries reintroducing border checks for Chinese tourists, but adds that “it is obvious from the PMIs that the pandemic is interrupting production and demand but price action in CNH suggests investors are visibly betting on a turnaround in the economy sometime after the lunar new year.”

FINANCIALS:

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  Big Banks - Banking analysts and lobbyists are urging the Fed to ease banks’ capital requirements to help improve liquidity in the Treasury market, as some gauges of Treasury market liquidity slumped in late 2022 to the worst levels since March 2020, the FT reports. Banks want to exempt Treasuries and cash reserves from calculations of their Supplementary Leverage Ratios (SLR), which would allow them to participate more in the market, the report said. The Fed is due to conduct a holistic review of capital rules for the banking sector in 2023, but some warn that any easing of capital rules will likely to be accompanied by an increase in capital requirements elsewhere, which is unlikely to please banks.


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  Crypto - Sam Bankman-Fried is expected on Tuesday to enter a plea of not guilty to criminal charges that he cheated investors and looted billions of dollars at his now-bankrupt FTX cryptocurrency exchange, according to a source cited by Reuters.


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  JPMorgan Chase & Co. (JPM), Deutsche Bank (DB) - JPMorgan and Deutsche Bank ask US judge to dismiss lawsuits by women who accused Jeffrey Epstein of sexual abuse and said the banks enabled and ignored red flags about the late financier’s sex trafficking, The Guardian reports. The banks say they did not participate in or benefit from sex trafficking by Epstein, the women failed to allege violations of a federal anti-trafficking law, and the banks had no duty to protect the women from Epstein and did not cause his abuses.


• 
  BGC Partners, Inc. (BGCP) - Updates Q4 outlook, now sees Q4 earnings above the midpoint of the range of its previously stated outlook. Adds that revenue would have been approximately USD 14mln higher, if not for the stronger USD during the period, and in-line with last year’s fourth quarter revenue, excluding Insurance. BGC said its new guidance reflects continuing FX headwinds for the EUR and GBP currencies, which are tracking lower Y/Y.


• 
  Acacia Research Corporation (ACTG) - The acquisition company backed by activist hedge fund Starboard Value is conducting an internal investigation into apparent misconduct of former CEO Clifford Press, who may have misused corporate funds for personal use, and for making charitable donations in his own name.


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  Twitter - Fidelity slashed its carrying value of Twitter by 56% during the first month of Elon Musk’s ownership, according to a new disclosure, Axios reports. Fidelity was among the group of outside investors that helped CEO Elon Musk finance his USD 44bln takeover by purchasing equity, and holds the Twitter shares in several of its mutual funds, under the name “X Holdings I Inc.”

COMMUNICATIONS:

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  Walt Disney Company (DIS) - Disney’s Avatar 2 has made USD 1.38bln worldwide since its release on December 16th, on the precipice of passing its approximately USD 1.4bln break-even point, according to Variety, which added that the movie is now the fifteenth highest global release of all-time.


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  Meta Platforms, Inc. (META) - Meta is preparing whether it will allow former US President Donald Trump back on to its Facebook and Instagram platforms, which the FT says will be the most polarising moderation decision that it has made to date. The decision was expected in the first week of January, but is now expected to be announced later in the month, sources said.


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  TikTok - Republican congressman Mike Gallagher, who introduced legislation to ban TikTok in the US, told NBC’s Meet the Press that the sale of the TikTok to a US company would be “one acceptable outcome”. Gallagher likened TikTok to “digital fentanyl,” and said the platform was “addictive and destructive,” and “ultimately goes back to the Chinese Communist party.” He said that “TikTok is owned by ByteDance. ByteDance is effectively controlled by the CCP. So, we have to ask whether we want the CCP to control what is on the cusp of becoming the most powerful media company in America.”


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  Social Media Regulation (META, GOOG, PINS, ETSY, IAC) - Days after Congress passed a bipartisan spending bill banning TikTok from government devices, legislators and advocates say they are looking to further regulate social media companies in 2023, CNBC reports. GOP’s Mike Gallagher thinks the TikTok ban should be expanded nationally, although Dem’s Amy Klobuchar warned that the tech lobby was so powerful that bills with “strong, bipartisan support” can fall apart quickly.


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  Tencent Holdings (TCEHY), NetEase Inc (NTES) - China's SCMP reported that 2023 will be better for Tencent and NetEase than 2022, as Beijing eases game licensing restrictions. Beijing now views the industry as an important business instead of ‘spiritual opium’, though analysts warned that even with more game approvals, video gaming firms will need to work hard to turn their fortunes around.


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  Take-Two Interactive Software (TTWO) - Constructive mention in Barron’s, which thinks the stock may have bottomed after sliding 43% in 2022. Barron’s notes that Stifel is positive on TTWO as the game maker bets big on game demand in the coming years; plans to release 24 games between 2023-2025, which is expected to include GTA6.


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  Warner Bros. Discovery (WBD) - Constructive mention in Barron’s. Discovery fell 60% in 2022 as subscribers shift to cheaper ad-supported plans; Benchmark’s analysts argue that this could set up nicely for Warner. Warner is to combine its HBO Max and Discovery+ platforms, and an ad-supported tier could bring down churn, Benchmark says.

TECH:

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  Microsoft Corporation (MSFT), Activision Blizzard, Inc. (ATVI) - The first pre-trial hearing in the Biden administration’s case against Microsoft over its USD 69bln bid to take over Activision Blizzard has been set for January 3rd, Reuters reports. The report adds that the case is a sign of the administration taking a muscular approach to anti-trust enforcement, but antitrust experts say the case faces an uphill battle due to the voluntary concessions offered by Microsoft to allay fears it could dominate the gaming market.


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  Cloud Names (AMZN, GOOG, MSFT) - Growth within the cloud computing sector may have reached a watershed, FT reports, as increasingly cost-conscious customers and economic pressure dampen one of Big Tech’s hottest growth markets. There is pressure from customers to reduce costs, while some complain that large cloud companies were not moving quickly enough to lower charges as the volume within the sector has soared, despite greater efficiencies from larger scale.


• 
  Semiconductors - China has cracked a microchip design method previously only mastered by the West, in a challenge that could undermine sanctions, The Telegraph reports citing patent filings which reveal that Huawei has made advances in a crucial method of chip manufacture. This would raise the prospect that it could eventually start making some of the smallest and most powerful microchips by itself, allowing Beijing to skirt Western sanctions.


• 
  Apple Inc. (AAPL) - CEO Cook in mid-December urged Japan PM Kishida to consider user protections when regulating smartphone app distribution as it faces growing pressure to open up to third-party app stores, Nikkei reports. Apple has come under fire in Europe and elsewhere for requiring all app downloads on the iPhone go through its official App Store, and Cook’s trip to Japan was likely intended to prevent similar arguments from gaining momentum in Japan.


• 
  Apple Inc. (AAPL) - Morgan Stanley said App Store net revenue grew 1% Y/Y in December, the first month of growth since June. MS says this means Dec Quarter App Store net revenue grew 7% Y/Y, including Apple's 14th week, which is tracking ahead of Morgan Stanley's initial estimate for -1% Y/Y. MS adds that this model +7% Y/Y Dec Quarter services growth, indicating upside vs Morgan Stanley's estimate of +5% Y/Y.


• 
  Micron Technology (MU) - Constructive mention in Barron’s, which reports that Micron is one of Wall Street’s ‘buy the dip recommendations’ after falling 46% in 2022. UBS has said that COVID drove customers to stockpile components; memory has the shortest lead time in semis, and was the poster child for this stockpiling, but inventory digestion for memory could be relatively quick.

CONSUMER CYCLICAL:

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  Tesla, Inc. (TSLA) - In a September 2022 filing, the US National Labour Relations Board (NLRB) Tampa regional director alleged Tesla illegally coerced Florida employees by restricting them from discussing workplace issues, Bloomberg reports.


• 
  Li Auto Inc. (LI) - December 2022 deliveries +50.7% Y/Y to 21,233 vehicles, bringing Q4 deliveries to 46,319 (+31.5% Y/Y). 2022 total deliveries +47.2% Y/Y to 133,246.


• 
  NIO Inc. (NIO) - December 2022 deliveries +50.8% Y/Y to 15,815 vehicles, bringing Q4 deliveries to 40,052 (+60.0% Y/Y). 2022 total deliveries +34% Y/Y to 122,486.


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  XPeng Inc. (XPEV) - December 2022 deliveries of smart EVs 11,292 vehicles; total vehicle deliveries for Q4 reached 22,204; End-2022 YTD deliveries 120,757, +23% Y/Y.


• 
  Norwegian Cruise Line Holdings Ltd. (NCLH) - A US judge said Norwegian Cruise Lines must pay USD 110mln in damages for use of a port that Cuba’s government confiscated in 1960, Reuters reports. The decision follows a March ruling that the use of the Havana Cruise Port Terminal constituted trafficking in confiscated property.

INDUSTRIALS:

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  Lockheed Martin Corporation (LMT) - Lockheed was awarded a USD 7.84bln contract modification; adds scope to procure 127 F-35 Lot 16 aircraft, to include 89 F-35A aircraft, 23 F-35B aircraft, and 15 F-35C. Also definitizes a modification in support of F-35 Lot 15 aircraft procurements and associated auxiliary equipment.


• 
  Southwest Airlines Co. (LUV) - Southwest is sparing nothing in an operations review after a Christmastime meltdown stranded thousands of passengers, but that is not likely to include junking its network or losing its top executive, Bloomberg reports.

MATERIALS:

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  Univar Solutions Inc. (UNVR), Brenntag SE (BNTGY) - Brenntag ended early takeover talks with US rival Univar, Reuters reports, weeks after activist investor PrimeStone called on Brenntag to consider a break-up instead.

HEALTH CARE:

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  COVID Vaccine Makers (AZN, BNTX, GSK, JNJ, MRNA, NVAX, VALN) - EU has reportedly contacted China offering variant-adapted EU vaccine donations alongside public health expertise, FT reports citing sources. The report adds that China has not responded yet.


• 
  Pharma (PFE, GSK, BMY, AZ, SNY) - Drugmakers including Pfizer, GSK, Bristol Myers Squibb, AstraZeneca, and Sanofi plan to raise prices in the US on more than 350 drugs in early January, Reuters reports, as the industry prepares for the Inflation Reduction Act, which allows the Medicare health programme to negotiate prices directly for some drugs starting from 2026. High inflation and supply chain constraints have also led to higher manufacturing costs.

REAL ESTATE:

• 
  Realty Income Corporation (O) - To acquire up to 185 single-tenant retail and industrial properties from subsidiaries of CIM Real Estate Finance Trust for approximately USD 894mln in cash.

03 Jan 2023 - 09:30- Research Sheet- Source: Newsquawk