MARKET WRAPS
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CPI for December
Opening Call:
Stock futures crept lower ahead of data that are expected to show the largest annual increase in prices in four decades, underscoring the broad inflation pressures affecting the economy.
The consumer-price index, a key measure of inflation, is forecast to top 7% annually for the first time since 1982 when figures for December are released at 8:30 a.m. ET.
The Federal Reserve appears poised to lift interest rates as soon as March due to concerns over a tight labor market and elevated inflation. Jerome Powell called high inflation a “severe threat” to a full economic recovery Tuesday and said the central bank was preparing to raise interest rates because the economy no longer needed emergency support.
Stocks have seen choppy trading this week as investors assess the potential impact of sooner-than-anticipated rate rises and await clarity on when inflation may peak.
When interest rates are low, investors tend to load up on risk assets such as stocks to generate returns. When inflation accelerates and policy makers raise rates, the value of companies’ future earnings drops and investors have more alternatives for places to make money. This particularly hurts technology stocks that promise expanding future profits.
“Inflation is uncomfortably high and this has had a negative impact on growth stocks,” said Luca Paolini, chief strategist at Pictet Asset Management. He is waiting to see if higher inflation weighs on profits in the coming earnings season.
Overseas, the pan-continental Stoxx Europe 600 rose 0.4%, led by gains in the basic resources and oil and gas sectors, while major stock indexes jumped by the close of trading in Asia.
Economic Insight:
Oxford Economics expects transportation bottlenecks to persist well into 2022, with problems existing throughout the supply chain, spanning from port and ship capacity to the ability of logistics networks to deliver goods to their final destination.
Container shipping rates are currently around nine times their level relative to June 2020, said Kiki Sondh, economist at Oxford Economics. Even as ports increase operating hours to ease congestion, absenteeism related to renewed increases in Covid-19 infections may scupper hopes of these pressures abating in the near term, she said.
“As a result of the transport and logistics challenges, sequential momentum in industrial activity will remain muted, but a pickup later in the year will boost 2023 prospects.”
Stocks to Watch:
Pfizer said it’s cutting “a few hundred positions” in its U.S. sales force to reflect a changing sales environment that involves fewer face-to-face meetings with physicians and providers and more digital and telehealth settings.
Pfizer said the decision is driven by its customers but the digital trend was accelerated by the pandemic, and it will also create about half the total number of cut jobs in new areas focusing on digital efforts.
“We are evolving into a more focused and innovative biopharma company, and evolving the way we engage with healthcare professionals in an increasingly digital world.”
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US Steel expects to break ground this quarter on its latest mill in Osceola, Ark., near its Big River Steel plant, and expects to begin operations in 2024.
The facility, a roughly $3 billion project, is expected to feature two electric arc furnaces with 3 million tons a year of advanced steelmaking capability, an endless casting and rolling line and advanced finishing capabilities, the steelmaker said. It plans to seek LEED certification.
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Forex:
The dollar continued to lose ground against most other major currencies except the yen as Powell’s comments on Tuesday triggered a risk-on mood in European markets.
Powell indicated that Fed officials have afforded themselves maximum flexibility to deal with changing dynamics, while seeking to remove a belief that they are stuck on a set path, said Pepperstone. While the Fed chairman didn’t really push back on market pricing around Fed rate increases, relief has certainly played out across markets, Pepperstone added.
In the wake of Powell’s testimony, the dollar fell to its lowest since late November against a basket of currencies and it may take a “material upside surprise” in the U.S. inflation data to avoid further falls, said MUFG.
The dollar’s falls suggest a need for “more caution in chasing the dollar higher,” said MUFG. If December annual CPI is in line with expectations at 7% or weaker, then dollar selling “will gather momentum.”
“The Fed’s tightening and reducing of stimulus is to a large extent baked into the market now, and I think that’s why the dollar stalled in December even though there was this continuous market chatter about the Fed’s hawkish pivot,” said Scott Petruska, chief currency strategist at Silicon Valley Bank. Likewise, the most recent Fed minutes also didn’t provide the fuel dollar bulls were looking for.
Petruska said markets are really long the dollar and have been since last September, a situation that makes it tough for the dollar to strengthen more. “It’s going to be a challenging year for the dollar to continue to move higher” especially when other big central banks turn more hawkish.
TD Securities said the dollar could rise before the Fed delivers its first interest rate rise but may turn lower thereafter.
“We have now seen 24% of the world’s major central banks raise rates recently, which may limit how much and how long the USD can rally,” said TD analysts. “The global backdrop of central bank synchronization, above-trend global growth, USD overvaluation, and friendly financial conditions means the start of the Fed cycle could start the next USD top.”
TD expects the DXY dollar index to rise to 97.8 in the second quarter as it sees the first rate increase in June. It sees the DXY starting to fall in the third quarter, hitting 95.2 by year-end.
December’s CPI numbers are unlikely to bring a respite to the Fed, said Amherst Pierpont’s Stephen Stanley.
“I would expect that the FOMC will remain in scramble mode until there is evidence of sustained moderation in inflation. That signal is unlikely to appear in the December CPI figures.”
Stanley expects the headline figure to have risen 0.4%, pushing the 12-month figure to 7%, “though the [monthly] gain could easily be 0.5%.”
Bonds:
Treasury yields were little changed after 10- and 30-year maturities posted their biggest declines in weeks on Tuesday following Powell’s re-confirmation hearing.
The spread between 2- and 10-year yields, along with the gap between 5- and 30-year rates, flattened on signs of lingering economic worries and one part of the yield-curve was threatening to invert.
Powell said “the economy no longer needs or wants” the aggressive stimulus the central bank has been providing and “it is time” to start the process of normalization. But he added “it’s a long road to normal.” Powell doesn’t believe providing less stimulus will hurt the job market, and when it comes to the Fed balance sheet, he said “at some point, perhaps later this year, we will allow the balance sheet to run off.”
Cornerstone said the 10-year Treasury yield will stay around 1.5%-1.6% this year and won’t reach the 2.5% many analysts foresee, arguing that the benchmark is driven primarily by Fed policy, German bund yields and U.S. real GDP growth.
“We expect 4% Real GDP y/y this year, with inflation slowing significantly in 2H,” said Cornerstone. “That will keep the Fed from moving the 4 times markets now discount…Instead, we anticipate only 2 hikes in 2022, weighing on 10-Year yields.”
Cornerstone said that even major deviations from its baseline scenario wouldn’t take the 10-year close to 2.5%.
Commodities:
Oil futures rose in Europe on a broad risk-on rally after Jerome Powell’s testimony, with expectations that supply will remain constrained also supporting prices.
Powell’s reassurances that the Fed can fight inflation were buoying risk assets including oil, said DNB Markets. At the same time, skepticism that OPEC can meet its production quotas was also supporting prices, said Joel Hancock, energy analyst at Natixis.
OPEC has pledged to increase supply each month but some members are failing to meet their quotas, Hancock said. “The real question is, what is the actual spare capacity of the group?”
Fitch Solutions said jet fuel demand could recover over the subsequent quarters after weakness in the first 3 months of the year, forecasting prices of the oil product to rise 2.4% to average $79.50/bbl in 2022 as global air-travel setbacks ease.
Fitch said the recovery in air travel stalled in December, which could set the stage for continued weakness in the first quarter. However, “barring a significant resurgence in global lockdown efforts and wider border closures, jet fuel demand should return to trend” upwards.
That said, Fitch said the long-term jet-fuel demand outlook is uncertain as international business travel may decline, despite pent-up demand likely boosting holiday air travel.
Gold edged lower in European trade with high inflation a key argument for firmer bullion prices but the prospect of higher U.S. interest rates to tame inflation seen as a negative, said analysts.
Goldman Sachs said the global aluminum market is likely to experience a “copper-style scarcity” this year, as energy shortages force European metal smelters to curb their operations.
Goldman Sachs estimates production losses of 340,000 tons in the first half, pushing the aluminum market into deficit.
“Aluminum’s projected global deficit [1.8 million tons] now just surpasses total visible global inventories, which increases the risk to a near-depletion of LME units this year as part of solving metal requirements.”
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January 12, 2022 05:56 ET (10:56 GMT)
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