US EARLY MORNING: US equity futures are flat ahead of weekly jobs data, Fedspeak; Friday NFP coming into focus ahead of next week's CPI

SNAPSHOT: US equity futures are trading around flat, yields along the Treasury curve are little changed, though tilting higher as the shape of the curve modestly steepens. Crude contracts are higher by 40-50c, shrugging off warnings from the US that SPR releases could follow as a response to OPEC’s tightening supply conditions on Wednesday. The Dollar Index is around flat. Attention is shifting towards Friday’s key jobs data, which will form an important part of building expectations regarding the November 2nd FOMC (80% chance of a 75bps rate rise, taking the FFR target to between 3.75-4.00%, according to money market pricing), while next week’s CPI data will help refine those expectations further. Energy and geopolitics still represent headline risks, while Fed officials haven’t been adding too much to the narrative this week.

WHAT TO MAKE OF THE EARLY WEEK RALLY: This week’s equity price action has left some scratching their heads as to where we stand in the current equity cycle, and what exactly does this week’s early rally, followed by Wednesday’s losses tell us about market direction. Capital Economics says the price action shows that we are not out of the woods yet, and points to the bond market as setting the tone (Monday and Tuesday's bond trading was largely characterised as hopes that the Fed will pivot on policy soon given the softness in the ISM manufacturing and JOLTs data series), and while it thinks that bond yields are close to peaking (though thinks they will not fall back much soon), it still thinks that equities will remain under pressure as the economy falters, even after the rout in bonds ends. CapEco also argues that fixed income markets' view of the economic outlook is optimistic, which it says is not being factored into HY spreads and equity risk premiums, adding that this also jars with analysts’ still-rosy forecasts for earnings. The upshot, it says, is that there may be more downside to come for the stock market. Citi's equity strats have also warned clients against chasing equity rallies arguing that although valuations appear more realistic now vs recent weeks, profit forecasts are still too optimistic. Citi expects profit downgrades to pick up next year, projecting EPS declines of 5%, but the bank remains constructive in the medium-term, arguing that global equities could rally by 18% from now to the end of 2023, though the ride will be volatile.

DAY AHEAD: DAY AHEAD: The ECB meeting minutes (primer here) is the highlight of the European data slate. Elsewhere, the meeting of the European Political Community is taking place today ahead of tomorrow's informal meeting of heads, meaning commentary on geopolitical themes (read: Russia) and energy will likely be coming thick and fast. The US day has Challenger layoffs and weekly initial jobless claims ahead of Friday's NFP data (our NFP preview is here); Fed speakers include Fed's Cook (voter), Fed's Waller (voter), and another showing from Fed's Mester (2022). On the supply front, the US Treasury will announce the sizes for next week's 3s, 10s and 30s. Our full day ahead can be accessed here.

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06 Oct 2022 - 09:18- EquitiesExclusive- Source: Newsquawk

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