US EARLY MORNING: US equity futures are flat and Treasury yields are lower ahead of inflation data

SNAPSHOT: US equity futures are flat, Treasury yields are lower by 2-4bps (3s are outperforming), though major curve spreads are little changed. The Dollar Index is also flat, sub-105.00. The focus is on today’s CPI release out of the US, which we preview below. The data might not impact the FOMC’s December meeting too much (it is expected to lift rates 50bps), though may have more influence on expectations of how far the Fed will lift rates, and how long it will keep them elevated (Powell will be quizzed on this tomorrow, no doubt).

PREVIEW - US CPI (13:30GMT/08:30EST): Analysts expect US headline CPI to rise +0.3% M/M in November (prior: +0.4%); the annual measure is seen moderating to 7.3% Y/Y (prior: 7.7%). The core measure is seen matching the rate of growth seen in October at 0.3% M/M, while the annual core measure is seen easing to 6.1% (prior 6.3%). In October, core CPI fell sharply after hefty readings in both August and September, and along with other inflation metrics, has resulted in a reassessment of inflation expectations, with many now more forcefully making the argument that inflation pressures have turned a corner. Morgan Stanley itself looks for inflation to remain at these more moderate levels going forward, as the disinflationary forces continue, and the bank expects the November report to confirm the slowdown. The University of Michigan’s prelim December data, as well as the NY Fed’s most recent consumer inflation expectations surveys both showed easing expectations of future price pressures. While the data is unlikely to shift the dial too much for the December FOMC (the Fed announcement is due Wednesday at 19:00GMT/14:00EST), where a 50bps rate rise is assumed to be a done deal given the recent commentary from Fed officials, it could be influential in shaping expectations of where the terminal rate will eventually be (currently, markets expect rates to peak at 4.75-5.00% in March 2023, where it is expected to remain until the November 2023 meeting, after which the market expects rate cuts). For context, historically the Fed has typically stayed at terminal for between 3-15 months, with the average being around 6.5 months. Analysts at JPMorgan have outlined the playbook for how to trade the data in various scenarios: 1) if the headline prints 7.8%+ Y/Y (JPM sees 5% chance), it thinks "inflation moving higher after the November print would likely have investors questioning whether the Nov was an aberration and if inflation is reaccelerating from here. Further, the near-term inflation outlook is muddled as the Chinese reopening could prove to be inflation." JPM sees SPX down 4-5% in this scenario. 2) 7.5-7.7% Y/Y (25% chance), "if the CPI is to miss hawkishly, the misses this year have ranged from 10-30bps. The 20bps+ misses have triggered an average -2.3% move in the SPX. Should this outcome occur, given the recent bear rally, we could see a more dramatic move here." JPM sees SPX down 2.5-3.5% in this scenario. 3) 7.2-7.4% Y/Y (50% chance). "This inline print is a market positive event but given positioning being less light than in November but is historically low. This could initiate short-covering as well as shifting the near-term trading range higher, potentially from 3700-3900 to 3850-4150." JPM sees  SPX up 2-3% in this scenario. 4) 7.0-7.2% Y/Y (15% chance). "A bullish outcome that could pull terminal rate lower despite expectations for higher DOTS being released the next day. While 2 data points is not a trend, this may embolden bulls especially if commodity prices continue their decline." JPM sees SPX up 4-5% in this scenario. 5) 6.9% Y/Y or lower (5% chance). "A print here could be the technical end of the bear market, putting this latest rally at a more than 20% move from its lows in October. The logic here is that not only is inflation dissipating but its pace is accelerating. This would give increasing confidence in projections of headline inflation falling ~3% in 2023. Further, if inflation is at 3%, irrespective of the labour market conditions, it seems unlikely that the Fed would hold the terminal rate at 5%. Any Fed pivot will rip Equities." Sees SPX rising 8-10% in this scenario.

BOFA DECEMBER FMS: BofA's December Global Fund Manager Survey says investors are bearish on growth, bullish China reopening, very bullish inflation and bonds, bearish on the USD, are short covering their stock positions, particularly in tech, emerging markets, and Europe, Europe. The report says that bond bears have been burnt, but FMS cash levels are still high (5.9%), while risk appetite is still low, and allocations are still defensive. BofA says the January/February pain trade is up for bond yields and risk assets. Survey finds that a net 69% expect weaker global growth, but the level of pessimism is stable owing to China, where 74% of those surveyed expect a full reopening by the end of 2023). Macro doubts mean CIO’s want CEO’s to focus on balance sheets (56%), not capex (21%) or stock buybacks (16%), BofA says. The good macro news, however, is that a record 90% of investors see lower global inflation in 2023. On the Fed, those surveyed see the Fed Funds Rate peaking at around 5% in Q2 2023; expectations for lower rates highest since March 2020, and for lower bond yields are close to all-time highs. Cash levels may have peaked, with BofA's FMS cash falling from 6.2% to 5.9%. On Asset allocation, FMS investors say best performing asset in 2023 will be government bonds, and are most overweight on bonds against stocks since Apr 2009. BofA says peak yields means peak USD, with the highest expectations of USD depreciation since May 2006.

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13 Dec 2022 - 09:07- Fixed IncomeData- Source: Newsquawk

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