US EARLY MORNING: US equity futures are higher ahead of key CPI data; annual consumer prices seen cooling again in April

US equity futures are firmer by 0.4-0.7% (NQ +0.7%, RTY +0.6%, ES +0.5%, YM +0.4%), after a constructive APAC session, underpinned by hopes of stimulus and an improving COVID situation in Shanghai. The European day has gotten off to a solid start too amid lots of earnings reports and deal news. Data overnight showed Chinese CPI inflation rising (higher food and fuel prices, but core was pretty much unchanged), although factory gate inflation cooled. Final inflation data out of Germany this morning were unrevised. Attention will be on the US inflation metrics, released later today, amid an expectation that annual price pressures will ease again (we have a primer here). Treasury yields are lower by 3-5bps, with the rally most pronounced in the belly, while curve spreads are biased towards flattening. The choppy nature of stock performance in recent days has left many strategists scratching their heads, but the team at Bank of America argues that stocks have still performed somewhat predictably based on macro sensitivity. “Notably, the discount rate has explained much of the S&P 500’s behaviour,” BofA writes, “equity duration is close to a record high, and the smallest fluctuations in the cost of capital have driven outsized moves,” noting that a 10bps rise in the cost of equity usually translates to a 2% fall in the S&P 500 index, ceteris paribus. “It’s all about the discount rate,” the bank says, “rates sensitivity at an index level translates into beneficiaries and victims at a stock level, and real rates just flipped positive to 0.3% from -1.1% last December.” BofA sees US 10yr yields rising to 3.25% by year-end, which it says will be a negative for long duration assets. “But the magnitude of the move from here is likely to be lower (+22bps through year end vs. +152bps YTD) translating into lower rates volatility,” adding that “rates volatility is one of the biggest determinants of the S&P 500 equity risk premium, and a drop would be equity positive.” The bank highlights MPC, QRVO, LYV, LVS, NXPI, LYB, URI, EQIX, AKAM, CBRE as its top ten stocks most sensitive to rates (using a nominal interest rate beta), and APA, CZR, DVN, MRO, NCLH, RCL, PENN, HAL, WYNN, FANG as the top ten most sensitive stocks to changes in equity risk premia (using a 5yr price beta).

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11 May 2022 - 09:31- Data- Source: Newsquawk

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