US EARLY MORNING: US equity futures are around flat, maintaining gains in wake of Powell; Treasuries are bull-flattening ahead of PCE data

SNAPSHOT: US equity futures are trading with small losses, but have still managed to maintain the bulk of gains seen in wake of a dovish Fed Chair Powell. This is not too surprising given the magnitude of gains booked in wake of Powell. Whether this upside can be sustained and built upon in the near-term (and before the December 14th FOMC) will be influenced by the macro data releases due out over the coming days (ISM, PCE today; NFP tomorrow – our NFP preview is here). Today’s PCE is expected to cool, and that view was endorsed by Fed chair Powell on Wednesday, while the ISM manufacturing data may fall beneath the neutral 50.0 level; meanwhile the rate of payrolls growth is likely to cool in November, Friday’s NFP data is expected to show. Treasuries continue to rally on Thursday, with the curve bull-flattening as yields narrow between 1-9bps across the curve (most of the outperformance is in the long-end of the curve. The Dollar Index is on course to print its second week of losses, and is now trading with a 105-handle (vs a 108-handle last week); November saw the dollar put in its worst monthly performance against the yen since 1998, the worst performance against the EUR since 2010; even the GBP enjoyed its best month vs the buck since 2020, while the Aussie had its best monthly performance against the USD since 2016. Meanwhile, crude futures are higher, underpinned by global risk sentiment; OPEC+ is likely to maintain policy at its weekend meeting, multiple sourced reports have said this week, though some are still looking for an output cut.

OUTLOOK: Wednesday’s rally in wake of a dovish Fed Chair Powell lifted the S&P 500 above its 200dma (around 4,050), with the index closing above its 200-day moving average for the first time since April. While cementing a downshift in the pace of rate hikes at the December meeting is giving traders a bullish catalyst, analysts note that the eventual peak of the cycle, when it is seen, and how long policy is kept at those levels is becoming a more important consideration in judging how durable the equity rally can be. Money markets are now discounting a 50bps December rate rise with over 90% certainty, while expectations of where the terminal rate is has fallen back – markets now price the peak at 4.75-5.00% (previously, the market was positioning for 5.00-5.25%), which is expected to be seen in March 2023, and rates are expected to be held at that level until the end of 2023. Powell said that the Fed does not want to overtighten, but cutting rates was not something it would do soon. Historically, the Fed has typically stayed at terminal for between 3-15 months, with the average being around 6.5 months. However, officials are keen to impress that their approach will be determined by how much progress they are making towards their policy goals. The Fed Chair highlighted that the central bank was not trying to engineer a deep downturn, which would come at a great human cost, he said. A recent poll by Reuters revealed analysts are of the view that macro fundamentals will be the main driver for stock markets to snap back into an uptrend. The consensus view is that the S&P 500 will end next year at 4,200; JPMorgan overnight updated its forecasts, and is in line with that consensus view. The bank sees S&P 500 EPS at USD 205 next year, lowering its forecast from USD 225, and warned that the index could test 2022 (around the 3,577 mark) in the first half of next year.

DAY AHEAD: Final manufacturing PMIs out of the Eurozone are expected to be confirmed; the Eurozone jobless rate is expected to be unchanged at 6.6%. The main focus on the data slate will be US PCE data; Fed Chair Powell on Wednesday suggested the headline could fall to 6.0% Y/Y in October from 6.2%, while the core measure could ease back to 5.0% Y/Y from 5.1%. The ISM manufacturing report for November is likely to fall below the neutral 50.0 level, from 50.2 to 49.8, according to analysts surveyed. Elsewhere, weekly US initial jobless claims are on tap. On the speakers front, Fed's Bowman (voter), Logan (2023) and Barr (voter) will all give remarks in wake of today's PCE data; on the Euro front, ECB chief economist Lane and ECB's Elderson will deliver speeches. Our full day ahead calendar can be accessed here.

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01 Dec 2022 - 09:19- Research Sheet- Source: Newsquawk

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