US EARLY MORNING: US equity futures are rallying in sympathy with European counterparts; ISM, JOLTS, FOMC minutes later today will provide insight on growth, inflation and labour market

SNAPSHOT: US equity futures are trading higher, supported by peers in Europe, where lower-than-expected French and German inflation data (released today and yesterday respectively) are fuelling arguments that inflation has peaked, which will allow monetary authorities in the region to be less hawkish in the months ahead. Treasuries are also rallying solidly, with yields narrowing by 7-11bps across the curve (belly outperforms). The lower yields offer no support for the Dollar Index, which is falling towards 104.00 again, while constructive risk sentiment provides a boost to cyclical FX (the AUD leads amid reports that China is discussing easing the ban on Australian coal imports). Crude futures are lower (which many frame as a positive for the prospects of global inflation cooling); analysts expect data from the API after hours today and from the DoE on Thursday will show crude stockpiles building by 2.2mln barrels in the week, while distillates are expected to draw down 1.8mln and gasoline is seen drawing 1.5mln.

DAY AHEAD: Today’s economic releases will provide crucial insight on the inflation, growth and labour market fronts, with the release of the December ISM Manufacturing survey (headline expected to slip by half-a-point to 48.5), November JOLTS data (job openings are seen easing to 10mln from 10.3mln), and the FOMC’s December meeting minutes (where officials looked through some nascent signs of progress in tackling rampant inflation in favour of a hawkish showing - our full preview is here). We preview these events below. Traders are becoming more comfortable with the ‘peak inflation’ narrative, and are increasingly fretting about fragile growth dynamics; this week, the IMF warned that much of the world will fall into recession this year. Many expect that the Fed will eventually begin to express concern on the growth front, although this will likely not be seen until inflation has more meaningfully fallen back towards target, and the base case is still for today’s minutes to echo its hawkish messaging. That said, money markets are pricing a pivot later this year, with the central bank expected to start cutting rates at the back end of 2023, so any data that is supportive of this theme could help boost those expectations. Elsewhere, after hours, the API will release weekly inventory estimates. The full schedule for the Day Ahead can be accessed here.

PREVIEW - ISM MANUFACTURING (15:00GMT/10:00EST): The headline is expected to decline to 48.5 in December from 49.0. The prices component is seen easing to 42.6 from 43.0. On Tuesday, S&P Global's final manufacturing PMI data for December showed a fall to 46.2 from 47.7 in November, with output and new orders contracting at sharper rates. The report also noted that muted demand conditions also led to downward adjustments of stock holdings, as excess inventories built earlier in the year were depleted in lieu of further spending on inputs. On the labour market front, manufacturing job creation was only slight, S&P said, and largely linked to skilled hires, as firms displayed caution. It also said that sinking demand for inputs and greater availability of materials at suppliers led to a further easing of inflationary pressures.

PREVIEW - JOLTS (15:00GMT/10:00EST): Job openings are expected to cool to 10mln in November from 10.33mln in October, although it is worth noting that the official November jobs report surprised to the upside. Analysts will be carefully watching the quits rate for signs about how tight the labour market is (this rate fell to 2.6% in October from 2.7% - an increasing quits rate speaks to the confidence consumers have in seeking alternative employment, and conversely, a falling quits rate could signal some consumer caution in switching jobs) and wages measures. Pantheon Macroeconomics says that the JOLTS data series appears to be overstating the upward pressure on wages; business surveys are more sanguine. "On the face of it, the near-record number of job openings appears to suggest the labour market is tight enough to generate rampant wage inflation, but that’s not reflected in either the official wage data or private-sector survey measures," it writes, "the reason for this disconnect is not clear, but part of the explanation might be that firms are not actively recruiting for all the purportedly open positions." Regarding the tightness of the labour market, Fed Chair Powell has often cited the job-openings-to-unemployment ratio; Pantheon thinks that this metric will continue to signal labour market tightness for some time yet.

PREVIEW - FOMC MINUTES (19:00GMT/14:00EST): The minutes will be eyed for commentary on the terminal rate with the latest dot plot projections pencilling in a peak at 5.1% (FFR of 5.00-5.25%) from the current 4.25-4.50%, implying rate hikes will continue (via either three 25bps rises or another 50bp and a final 25bp hike). The minutes will also be gauged to see if there is an appetite to slow the pace of hikes to a 25bps increment in February, which will help determine the tightening pace to the peak rate. Any language within the minutes that suggests how long rates are held at the peak will also be key, although it will likely reiterate a data-dependent approach, but Fed’s Daly had suggested 11 months is a reasonable time frame and that everyone on the Fed sees rates at terminal throughout 2023; historically, it has remained at terminal for between 3-15 months, and on average 6.5 months. There will also be attention on any commentary that expresses concerns about growth conditions, which many would take as a sign that the central bank is paving the way for a downshift and pivot later in the year.

CONSUMER CYCLICAL:

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04 Jan 2023 - 09:30- Research Sheet- Source: Newsquawk

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