US EARLY MORNING: Stocks pare back premarket gains, yields up; the focus is on inflation data this week and Fed Chair Powell

SNAPSHOT: Overnight trading in equities was underpinned by news that Beijing was dropping its pandemic border controls, while US data last week, where slowing measures of inflation are being dismissed in the face of slowing gauges of activity, is seeing traders bet that the Federal Reserve will eventually pivot its focus onto deteriorating growth dynamics to support the economy. However, although trading with gains, equities have pared back after the Europeans arrived, as yields ticked up along bond curves; US equity futures currently trade with only slight gains, while Treasury yields are wider by between 2-4bps this morning, with underperformance along the long-end. The Dollar Index continues to slip, and is now trading sub-103.50 (vs peaks of above 105.50 last week) after further signs of slowing inflation and weak growth. This week, the inflation vs growth debate will continue, and we share some thoughts below.

GROWTH VS INFLATION: The start of 2023 has been characterised by data that continues to allude to cooling inflation pressures combined with softening activity data that alludes to deteriorating growth dynamics. Judging by traders' reactions to last week's ISM reports (weak activity in both manufacturing and services) and nonfarm payrolls (wage growth cooling), there is a feeling that the 'peak inflation' narrative has now been fully discounted, and traders are increasingly fretting about the challenging growth situation. These dynamics will again be put to the test this week, with the release of various inflation reports out of the US (the NY Fed's survey of consumer expectations is released later today, the US CPI data for December is due Thursday, and the inflation expectations metrics within the University of Michigan's consumer surveys on Friday). If these inflation data continue to show a cooling in price pressures, traders will gain confidence in the notion that the Federal Reserve will need to pivot its focus to support the growth side of the equation, which may involve easing up on some of its hawkishness. Fed Chair Powell's remarks on Tuesday will also be eyed in this context (he is speaking on a panel about central bank independence, so there is some risk he disappoints those looking for any fresh insight), although the Fed is expected to continue its hawkish messaging on inflation until they see substantial evidence that inflation has indeed peaked and that its price target is back within sight. Despite the Fed's SEP seeing a peak Federal Funds Rate of 5.1% (5.00-5.25% FFR target), and warnings by some officials that if inflation doesn't behave, then 5.4% could also be seen (5.25-5.50%), money markets continue to see the peak at between 4.75-5.00 from March onwards, and expects rates will stay there until November, when markets begin to price rate cuts. Fed officials - burned by their incorrect pandemic view that inflation was transitory - are trying to re-establish their inflation targeting credentials, so are unlikely to relent on their hawkishness any time soon, although we are looking for some to begin introducing elements that suggest slowing growth is on their radar. Therefore, any backing away from baseline views of no recession this year, and any explicit confidence that inflation has peaked, could be latched onto by traders as a sign that some are laying the groundwork for the pivot. To be clear, this is not something many expect in the immediacy, but if current data dynamics continue, some argue that the Fed risks further policy embarrassment in the months ahead.

EARNINGS AHEAD: It will be a quiet start to the earnings season, and although almost 150 US companies will report in the week of January 9th, only a handful are in the S&P 500. However, six of these companies are large financials (BAC, BK, BLK, C, JPM, WFC), while healthcare giant UNH will also report -- all on Friday. For the earnings season more widely, analysts expect S&P 500 companies will report a decline in earnings of 1.6% in Q4, according to Refinitiv, and 'earnings recession' will be a theme that the analyst community focuses on. Analysts at Goldman Sachs expect no annual earnings growth in Q4, and see revenues growing by 8%, though this will be offset by an 81bps decline in margins to 11.2%. "Entering reporting season, earnings revision sentiment is negative relative to history," GS says, "and we expect further downward revisions to consensus 2023 EPS forecasts." The bank explains that China reopening is one upside risk to 2023 EPS, but margin pressures, taxes, and recession present greater downside risks. The bank itself sees 0% EPS growth to USD 224 in 2023 (the wider street consensus looks for +3%), though in a recession, Goldman estimates that EPS for the S&P 500 would fall by 11% to USD 200.

DAY AHEAD: It is a subdued start to the week in terms of scheduled data releases, with the Sentix for January and Unemployment data for November the only notable releases in the Eurozone. The stateside docket is also thin, with the aforementioned NY Fed survey of consumer expectations the stand-out ahead of CPI data later in the week, while Fed’s 2024 voters Bostic and Daly will deliver remarks. The daily schedule can be accessed here. Traders will perhaps be more focussed on this week’s events, which includes US CPI on Thursday, Fed Chair Powell on Tuesday, China CPI and trade data, UK GDP; and on Friday, large financials will begin reporting Q4 metrics as corporate earnings season gets underway. Our full week ahead preview can be accessed here.

INDUSTRIALS:

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  Suez Canal - Cargo vessel M/V Glory run aground in the Suez Canal, AP reported. The Suez Canal Chairman responded that the grounding had not affected waterway traffic, although subsequent reports said that around 20 vessels were backed up along the canal due to the grounding. After M/V Glory was re-floated, reports said that only minor delays were expected.


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  Deere & Company (DE) - Deere signed an MOU on Sunday that ensures farmers have the right to repair their own farm equipment or go to an independent technician, Reuters reports.

FINANCIALS:

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  Goldman Sachs Group, Inc. (GS) - The bank will start cutting up to 3,200 jobs (around 6.5% of its workforce) within days, as it tries to rein in costs in the face of a slowdown in investment banking and a paring back of its consumer bank, FT reports citing sources. The final number could be smaller. Goldman is set to release its next quarterly earnings report on January 16th.


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  Ant Group Co Ltd (6688 HK) - Jack Ma ceding control of Ant Group is a step that pushes Ant towards finishing its overhaul, WSJ reports. Overnight, the news supported shares of companies that have Ant Group as a major shareholder. Ant Group said it had been focusing on its business rectification and optimisation, and told Reuters that it does not have a plan for an IPO.


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  UK Banks (BCS, HSBC, NWG) - UK Banks – particularly Barclays (BARC LN), HSBC (HSBA LN) and NatWest (NWG LN) – are facing over 100 class action lawsuits which could potentially cost billions to resolve. The claims include allegations of price fixing, and manipulation of interest rates, but there are also claims that relate to alleged violations of US legislation covering terrorist financing.


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  Charles Schwab Corporation (SCHW) - Positive mention in Barron's; said Charles Schwab was ready to put 2022 behind it, and it was now time to buy.

COMMUNICATIONS:

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  Vodafone (VOD) - Vodafone will receive a cash consideration of EUR 1.7bln for its sale of Vodafone Hungary.


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  Social Media Names (GOOG, META, SNAP) - Seattle's public schools filed a lawsuit against Alphabet Inc, Meta Platforms Inc, Snap Inc and ByteDance claiming that the companies were responsible for a worsening mental health crisis among students and directly affected the schools' ability to carry out their educational mission.


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  Alibaba Group Holding Limited (BABA) - BABA announced that it will invest more than USD 1bln in Turkey for a logistics hub at Istanbul’s airport, and a data center near the Turkish capital, Bloomberg reports.


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  China Communications Names (BABA, WB) - Goldman Sachs adds Alibaba to Conviction Buy list (from Buy), and upgrades Weibo to Buy (from Neutral). GS says the worst is behind BABA, and has scope to repair valuations, while for WB, GS says weak brand advertising trends will likely reverse in 2023 vs 2022.

TECH:

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  Salesforce.com, inc. (CRM) - Co-CEO Marc Benioff hinted at more potential layoffs after last week's job cuts where it said it would eliminate 10% of its workforce, CNBC reports. Benioff told employees that more cuts need to be made, and that productivity was lacking from new salespeople as Salesforce’s revenue growth slows.


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  Apple Inc. (AAPL) - This year is set to be the year of Apple’s mixed-reality headset and not much else, Bloomberg reports, and after the postponement last year, Apple now aims to unveil it this spring ahead of the annual Worldwide Developers Conference in June. Elsewhere, Apple's iPhone exports from India have doubled to a record USD 2.5bln, Bloomberg said.


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  Microsoft Corporation (MSFT) - Microsoft is looking to add OpenAI’s Chatbot Technology to Word and email services so customers can automatically generate text using simple prompts, The Information reports, with the report adding that these goals will not be easy to accomplish. For more than a year, MSFT has worked to create personalised AI tools for composing emails and documents by applying OpenAI’s machine-learning models to customers’ private data.


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  SoftBank Group Corp. (SFTBY) - UK PM Sunak has restarted efforts to secure a London IPO for SoftBank's Arm IPO, meeting CEO Haas in London in December and being joined on the call by SoftBank founder Son, FT reports. The report added that the renewed effort was looking at sharing the listing with New York.


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  Adobe Inc. (ADBE) - CEO said US consumer sentiment looks fairly positive overall, US has demonstrated tremendous resilience, WSJ reports.

CONSUMER:

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  Tesla, Inc. (TSLA) - TSLA has reportedly begun offering incentives in Singapore on existing models of Model 3 and Model Y vehicles. Elsewhere, Reuters reports that hundreds of Tesla owners gathered at showrooms in China over the weekend, demanding rebates and credit after sudden price cuts they said meant they had overpaid for electric cars they bought earlier.


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  Tesla, Inc. (TSLA) - Short sellers targeting Tesla stock are heaping more pressure on the electric vehicle maker, and have increased short bets to around 79mln shares, Reuters reports citing data from S3 Partners. That is up almost 4%, or USD 325mln worth of new short sales, over the last 30 days, the report said. Barron's was constructive on the name over the weekend, writing that despite the issues that it has, and signs of difficult times ahead, the stock seems like a buy, and investors should focus on its strengths as the world's leading EV manufacturer, and its ability to produce cars at a much lower cost than its competitors, given it more scope to offer discounts than rivals.


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  Macy's, Inc. (M) - Macy's expects Q4 revenue to come in at the bottom-end of its previously issued USD 8.161-8.401bln guidance range (exp. 8.3bln), while EPS is expected to be within its 1.47-1.67 guidance range (exp. 1.60). It said total end-quarter inventories were on track to be slightly below last year, and down mid-teens vs 2019. Black Friday/Cyber Monday sales were in line with expectations, while the week leading up to and following Christmas were ahead. However, it said that lulls of the non-peak holiday weeks were deeper than anticipated. Throughout the season, Bloomingdale’s and Bluemercury continued to outperform. Based on current macro-economic indicators and our proprietary credit card data, Macy's believe the consumer will continue to be pressured in 2023, particularly in the first half.


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  Philip Morris International Inc. (PM) - Positive mention in Barron's; said Philip Morris stock was a buy, and was "about to get smoking hot." The report cites its recent acquisition of Swedish Match which cements its global leadership in oral nicotine, adding to its portfolio of 'reduced-risk products', which don’t require users to burn tobacco.

HEALTH CARE:

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  Biogen Inc. (BIIB) - Eisai and Biogen win FDA approval for Leqembi (lecanemab-irmb) under the Accelerated Approval pathway for the treatment of Alzheimer's disease. BofA's analysts said the approval came with a "fairly benign" label, which should bode well for the company. The approval was widely expected, but investors were watching the label it was issued. There was no mention of blood thinners in the warnings. BofA notes, however, that label does state that "caution should be exercised when considering the administration of antithrombic or a thrombolytic agent to a patient already being treated with lecanemab."


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  Pfizer Inc. (PFE) - Talks to negotiate a lower price for Pfizer's COVID pill Paxlovid in China have failed, officials said, after the two could not agree on a further cut, Bloomberg reports. It is currently covered by state medical insurance under a provisional measure, which will continue until end of March.


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  Regeneron Pharmaceuticals, Inc. (REGN) - FDA Dermatologic & Ophthalmic Drugs Advisory Committee to discus Regeneron's supplemental Biologics License Application for its Aflibercept Solution for intravitreal injection at a virtual meeting on January 9 at 09:30am.


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  CureVac N.V. (CVAC), GSK plc (GSK) - BofA issue a cautious opinion, after Friday's share price surge after CVAC issued a positive update from its Phase 1 trials for its monovalent COVID and flu mRNA vaccines being developed in collaboration with GSK (GSK); BofA said that it was likely too late for the shares to experience any COVID upside, given the COVID vaccine space is already well-served as demand for frequent boosters has not materialised. BofA finds the company's flu opportunities more interesting, but even here, competitors are far ahead.


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  AstraZeneca (AZN) - Acquires Cincor for its Cardiorenal asset. Upfront cash portion of the consideration represents a transaction value of circa. USD 1.3bln. Will acquire cash/marketable securities on Cincor's balance sheet, circa USD 522mln.


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  Exact Sciences Corporation (EXAS) - Prelim Q4 revenue seen between USD 550.7-552.7mln (exp. 506.5mln) (+16%, or +28% ex-COVID testing). For the FY22, revenue seen between USD 2.082-2.084bln (exp. 2.03bln).


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  Exelixis, Inc. (EXEL) - Prelim Q4 revenue seen at USD 415mln (exp. 414.8mln), and FY22 revenue seen at USD 1.6bln (exp. 1.6bln). FY23 revenue seen between USD 1.775-1.875bln (exp. 1.8bln).


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  Hologic, Inc. (HOLX) - Prelim Q1 revenue seen -27% at USD 1.074bln (exp. 966.4mln), above its guidance range of USD 940-990mln.


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  QuidelOrtho (QDEL) - Sees FY22 revenue between USD 4.038-4.053bln (exp. 3.23bln); Q4 revenue seen between USD 853-868mln (exp. 754mln). Q4 COVID revenues seen between 124-134mln, non-COVID revenues between 729-734mln.

09 Jan 2023 - 09:23- Research Sheet- Source: Newsquawk