US EARLY MORNING: US equity futures are lower ahead of key labour market data

SNAPSHOT: US equity futures are lower, the dollar index is flat, and yields along the Treasury curve are slightly higher in wake of FOMC meeting minutes released late Wednesday, which largely echoed the hawkish messaging of the December policy meeting and subsequent commentary from officials. There wasn’t anything particularly incremental learned from the minutes, with the Fed firmly in reactive mode contingent on incoming inflation data. The minutes leaned back on the dovish tilt of money market pricing, and emphasised that no officials were expecting rate cuts this year. There was nothing in the minutes to suggest that officials will be adjusting their policy focus onto slowing growth dynamics. Today’s focus will have a labour market feel, with the release of ADP’s monthly employment data and weekly claims data, ahead of Friday’s NFP release.

CORPORATE UPDATES: Corporate updates are taking a mixed tone ahead of the Q4 corporate reporting season. A Samsung executive warned on sluggish consumer demand, Amazon is ramping up layoffs, but Exxon expects better net income than the market was expecting despite lower crude and natgas prices in the quarter. BofA said global earnings expectations remain surprisingly resilient, and its Global Earnings Revision Ratio jumped in December from 0.59 to 0.82 on fewer downgrades. It said that the Ratio improved in all sixteen sectors and most regions. “Nevertheless, the Ratio remains low for the cyclical Risk style and tighter monetary policy could negatively impact corporate earnings in early-2023,” it added, “by itself, the higher Global Earnings Revision Ratio is positive for equities but earnings risks remain.”

CITI'S QUANT MODEL: Citi's update quant regime model notes that we are still in a challenging macro-environment, with high inflation, tighter financial conditions, and weak growth. "The model remains defensive, preferring bonds (US and Japan) to equities and IG credit vs its high yield and emerging market brethren, though JGBs may be meaningfully different this time around," the bank says. In the equities complex, the US bank says its model suggests overweigh positions for UK and Japanese equities. "With a recession the base case, continued high inflation is the key risk case to watch for the next year. Pre-1990s experience suggests higher risk-premia and less negative stock/bond correlation in a high inflation regime." The bank notes that trend-following strategies performed well over the last year, and the macro-environment means this performance is likely to continue.

FOMC MINUTES: Meeting minutes for the Fed’s December policy meeting largely echoed the hawkish messaging of the December policy meeting, warning markets that high inflation was still an issue, and the Committee was resolved to continue tightening until it had restored price stability. In line with recent commentary, participants welcomed the recent cooling of inflationary pressures, but wants to see substantially more evidence on this front. There was another warning to markets, with the Fed stating that any unwarranted easing in financial conditions, especially if driven by a misperception by the public of the Committee’s reaction function, would complicate its effort to restore price stability. The Committee will continue to make decisions on a meeting-by-meeting basis, which analysts say gives it policy flexibility regarding the size of hikes at upcoming meetings based on incoming data. Market expectations are currently tilted towards a 25bps rate rise in February. Crucially, no participants on the Committee anticipate rate cuts this year, contrary to market pricing, which looks for a rate cut towards the back-end of this year. Generally, there was nothing particularly new within the minutes; traders will continue to look to policymaker’s commentary to help shape expectations (Fed Chair Powell is due to speak at an event next Tuesday), though the tone of Fedspeak will be a function of incoming data on inflation, for now.

DAY AHEAD: European traders will be focussed on prelim Italian inflation metrics for December, to see if the trend of disinflation (as seen in France, Germany, Spain) continues ahead of Friday’s Eurozone-wide release. The US Day will have a labour market focus, with the release of ADP monthly jobs numbers, weekly initial jobless claims and continuing claims data; the former will help guide expectations for Friday’s nonfarm payrolls release, where 200k payroll additions are expected. The US will also release international trade data, where the trade deficit is likely to have narrowed again, but analysts still think net trade will detract from Q4 GDP growth. The EIA will also release weekly energy inventories; API data on Wednesday reportedly showed Crude +3.3mln (exp. +1.2mln), Cushing +0.7mln, Gasoline +1.2mln (exp. -0.5mln), Distillates -2.4mln (exp. -0.4mln), according to Citi. On the speakers front, Fed’s Bullard and Bostic will make remarks. Full Day Ahead schedule here.








05 Jan 2023 - 09:30- EquitiesData- Source: Newsquawk

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