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.







09 Jan 2023 - 09:23- EquitiesData- Source: Newsquawk

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