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Futures Slightly Green Ahead Of Today's "Brutal" CPI Print

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by Tyler Durden
Wednesday, Jan 12, 2022 - 08:00 AM

U.S. index futures were little changed, if slightly in the green on Wednesday as investors settled into a wait-and-see mode ahead of today's "brutal" CPI report which is expected to show the highest CPI print in nearly 40 years, a time when the fed funds rate was 11% compared to 0% now...

... and gauge the pace of Federal Reserve tightening. Consensus expects December CPI to show inflation climbing to 7.0%, a result which could see front- end fully price in a March rate hike (currently priced at 85%). Helping the overnight mood in Asia, was a moderation in China’s inflation pressures, with CPI dipping to 10.3% y/y in December, giving the central bank scope to cut interest rates to cushion the economy’s downturn just as most major nations look to tighten policy. At 730am ET, S&P futures were up 0.2% of 7.50, and Nasdaq futures rose 22 points or 0.14%, recovering toward Asia’s best levels; Dow futures were up about 0.1%. The dollar was slightly lower, extending on its recent sharp drop, while Treasury yields were steady.

“All we know is that the Fed has waited too long before taking action,” said Ipek Ozkardeskaya, senior analyst at Swissquote. “If today’s inflation print is higher than expected, recent gains in equities will melt like snow in the sun,” she wrote, even though investors seemed to put aside fears that tighter policy will stifle the economic rebound and market rally after soothing words from Federal Reserve Chair Jerome Powell. His testimony Tuesday helped arrest a five-day slide in the S&P 500, just as we predicted it would.

As Deutsche writes, the highlight of the last 24 hours was Chair Powell’s renomination hearing before the Senate Banking Committee. The overall communicated stance of policy wasn’t much changed with the hawkish pivot still on. Nevertheless, there were a few incremental takeaways. Powell did nothing to push back on liftoff being on the table in March, in line with our US econ team’s call and the increasing probability implied by the market, which is currently 85%. He made it clear that QE (yes it’s still happening) would finish in March, despite speculations it may come to an abrupt halt beforehand. In line with growing consensus, he painted a picture that made the start of QT likely in 2022. Finally, on the overall stance of policy, he emphasized the Fed needs to pull back from extreme levels of accommodation, but didn’t need to rush to get to a neutral stance of policy.

“It was a masterful performance really, leaving the bowls neither too full nor too shallow, but just right from the financial market’s perspective,” said Jeffrey Halley, senior market analyst at Oanda Asia Pacific, in an email. “The music can still play in equity markets in 2022, it’s just that we’ve likely seen the best of the technology gains.”

With three and possibly four Fed rate increases now priced in, strategists are turning more sanguine about inflation and focusing on positives such as the start of the earnings season. Markets have been buffeted by volatility at the start of the year on the prospect of faster interest-rate increases to subdue price pressures.

“Hawkish Fed repricing is likely largely done for now,” and “resilient earnings should help equities rebound,” Barclays Plc strategists led by Emmanuel Cau wrote in a note to clients on Wednesday.

Looking at the CPI print, DB's Jim Reid notes that repeated upside surprises in the inflation data have sent the year-on-year numbers up to multi-decade highs, putting significant pressure on the Fed. Indeed if you look at the monthly headline CPI reading, 7 of the last 9 releases have come in above the consensus estimate on Bloomberg. In terms of what to expect this time around, economists think that year-on-year CPI will rise to +7.0%, which will be the highest annual CPI number since 1982. And if that figure is realized, it would also mean that the real Fed Funds rate in December was around -7%, which for reference is lower than at any point in the 1970s, when the lowest the fed funds rate got in real terms was around -5%.

In the premarket, Dish Network Corp. rose more than 7% on a New York Post report of merger talks with DirecTV. PayPal shares dropped 1.9% in premarket trading after Jefferies cut its recommendation for the digital payments provider to hold from buy. Here are some of the biggest U.S. movers today:

  • U.S.-listed Chinese stocks rally in premarket trading, as Asian listings rebound amid bargain hunting and a reassuring tone from Fed Chair Jerome Powell. Alibaba (BABA US) +2.4%, JD.com (JD US) +1.5%, Pinduoduo (PDD US) +3.3%
  • Biogen (BIIB US) drops 9.1% in premarket trading after the U.S. government limited Medicare coverage of the company’s Aduhelm Alzheimer’s disease treatment and similar drugs to patients enrolled in clinical trials. The highly unusual move will curb access to the controversial treatment approved last year
  • Wells Fargo (WFC US) advanced in premarket trading as Piper Sandler upgraded its rating to overweight from neutral; cuts Premier Financial to neutral from overweight
  • Bed Bath & Beyond (BBBY US) shares jump as much as 4.9% in U.S. premarket trading, boosted by disclosures of insider purchases of the retailer’s stock made on Jan. 7
  • Rocket Lab USA (RKLB US) started at overweight, with $17 target by Morgan Stanley, which says the company offers high-quality exposure to the space race. Stock gains 4.1% in premarket trading
  • Cogent Communications (CCOI US) faces a “challenging setup” on weak growth and a high multiple, Wells Fargo writes in note as downgrades to underweight from equal-weight

European equities climbed back toward opening highs after a choppy first hour of cash trading. The Euro Stoxx 50 added 0.7%, FTSE 100 outperforms at the margin. Miners, oil & gas and tech are the strongest performing sectors.  In Europe, mining and technology companies led the Stoxx 600 Index up 0.5%. Philips slumped 14%, the most in two decades, after the Dutch producer of medical equipment reported lower preliminary revenue than expected. Here are some of the biggest European movers today:

  • Rexel jumps to an eight-year high after the French maker of electrical products said 2021 organic growth will be higher than forecast with Citi noting positive demand comments from firm.
  • VAT shares post their steepest gains in more than a month after the Swiss supplier of products for the semiconductor industry reported 4Q order intake that was well above expectations.
  • DFS Furniture shares gain as much as 6.4%, among the top advancers in the FTSE All-Share Index, after the U.K. retailer kept its FY pretax profit forecast unchanged.
  • Just Eat Takeaway stock rises after initially falling following an update. Citi analysts say the online food delivery firm’s 4Q results are broadly in line with an expected deceleration.
  • TeamViewer shares rise as much as 15% in Frankfurt after the company reported 4Q and FY billings that beat market expectations with RBC calling the results “reassuring.”
  • Sainsbury shares rise as much as 3.9% after the U.K. grocer boosted its outlook for the year. Profit delivery is strong, according to Jefferies.
  • BHP Group and European mining peers are among the biggest gainers Wednesday with UBS saying in a sector note that shares are cheap -- but valuations are not compelling.
  • Sweco shares fall as much as 6.8% after Danske Bank downgrades to hold from buy, noting “stalling execution” despite solid market demand for the engineering consultancy’s services.
  • Taylor Wimpey shares drop as much as 2.2% after a holder sold about 86m shares in the company at 163.75p apiece, representing a 3.7% discount to Tuesday’s close.

Earlier in the session, Asian stocks climbed to their highest level in almost seven weeks as Federal Reserve Chair Jerome Powell’s remarks spurred expectations that anticipated rate hikes won’t derail the global economic recovery.  The MSCI Pacific Index added as much as 1.6% to its highest since Nov. 26, bolstered by gains in the consumer-discretionary and information-technology sectors. Alibaba Group and Tencent Holdings were among the biggest contributors to the measure’s rise. Benchmarks in Hong Kong and Japan led gains for the region.  Powell pledged to do what’s necessary to contain an inflation surge and prolong the economic expansion at his confirmation hearing for a second term as U.S. central bank chief. Futures on the S&P 500 advanced in Asia trading after halting a five-day slide. A gauge of Chinese technology shares rallied after the Nasdaq 100 outperformed major benchmarks.  “The market view is that containing inflation with early rate hikes will turn out to be good for the economy -- that we’ll be able to push back on inflation while keeping the economy strong,” said Naoki Fujiwara, chief fund manager at Shinkin Asset Management in Tokyo. “Before, the market had been reacting simply to the words ‘monetary tightening’.”  Asia’s equity benchmark is attempting a rebound following last year’s 3.4% slump, when the gauge was hit by concerns over U.S. tightening, Covid-19 and a selloff in Chinese tech shares. Solid gains during Wednesday’s session will likely help spread a sense of relief, according to Fujiwara.  “We think there’s more attractiveness here in Asia and EMs overall. And valuations are much more compelling given overall EM/Asia markets have underperformed compared to U.S. and Europe,” Ken Wong, Asian equity fund specialist at Eastspring Investments, told Bloomberg Television. “In 2022, there will be opportunities to be selective.”

Japanese equities posted their first gain in four sessions, following a similar rebound in U.S. peers after soothing comments from Federal Reserve Chair Jerome Powell. Electronics makers and telecoms were the biggest boosts to the Topix, which closed 1.6% higher. Tokyo Electron and SoftBank Group were the largest contributors to a 1.9% rise in the Nikkei 225. Powell pledged to do what’s necessary to contain an inflation surge and prolong the expansion, while steering clear of fresh details on the path of U.S. monetary policy. The S&P 500 rose for the first time in six sessions. “The market view is that containing inflation with early rate hikes will turn out to be good for the economy - that we’ll be able to push back on inflation while keeping the economy strong,” said Naoki Fujiwara, chief fund manager at Shinkin Asset Management in Tokyo. “Before, the market had been reacting simply to the words ‘monetary tightening’.”

Indian stocks rose along with Asian peers after Federal Reserve Chair Jerome Powell reassured investors that the U.S. central bank will tackle inflation to extend the economic expansion.  The S&P BSE Sensex climbed for a fourth day, up 0.9% to 61,150.04 in Mumbai. The benchmark is 1% away from surpassing its record high touched in October. The NSE Nifty 50 Index advanced by a similar magnitude.  Reliance Industries Ltd. rose 2.7% and was among the biggest boosts to the key indexes. Of the 30 shares on the Sensex, 24 gained. All but two of the 19 sector indexes compiled by BSE Ltd. rose, led by a gauge of telecom companies.  IT major Wipro Ltd. reported net income for the third quarter that missed the average analyst estimate. Tata Consultancy Services Ltd. and Infosys Ltd. are also scheduled to announce Oct.-Dec. earnings in the day

Australian stocks also rebounded as mining shares hit 5-month highs.  The S&P/ASX 200 index rose 0.7% to 7,438.90, with miners and health-care contributing the most to the benchmark’s gain. The materials subgauge led the rebound, hitting the highest since Aug. 17.  Afterpay surged after the company said that Block, formerly known as Square, has now received approval from the Bank of Spain in respect of the acquisition by Lanai AU 2 Pty Ltd. Domino’s Pizza Enterprises dropped to its lowest since May.  Official data Wednesday showed job vacancies climbed to a record in Australia, up 18.5% to almost 400,000 in the three months through November. In New Zealand, the S&P/NZX 50 index fell 0.2% to 12,804.48

In rates,Treasuries were marginally cheaper across the curve, with the front-end underperforming ahead of December CPI release at 8:30am ET. Treasury 2-year yields higher by 1.8bp vs. Tuesday close while rest of the curve is less than 1bp cheaper on the day; 10-year yields around 1.74% with both bunds and gilts outperforming by over 2bp in the sector. Cash USTs bear flatten, cheapening roughly 2bps across the short end.  Session highlight also includes 10-year note auction, a $36b reopening: US auctions resume with a $36BN 10-year reopening at 1pm, followed by $22b 30-year reopening Thursday. The WI 10-year at around 1.745%, above auction stops since January 2020 and ~23bp cheaper than December stop-out which tailed 0.4bp. Elsewhere, bunds and gilts drift higher, with the 10y point outperforming. Bund futures regain 170. Peripheral spreads tighten slightly.

In FX, most G-10 currencies were confined to narrow ranges after the dollar’s drop yesterday and the Bloomberg Dollar Spot Index hovered while the Treasury curve bear-flattened as yields rose by up to 2bps, while commodity currencies outperform but trade off best levels with G-10 FX generally trading narrow ranges.

Demand for long gamma exposure into the next Federal Reserve meeting remains subdued even as realized volatility stays relatively high. The Norwegian krone was the best G-10 performer, followed by the Canadian dollar, as oil steadied above $81 barrel after posting the biggest one-day surge this year as investors embraced risk assets, commodities climbed and industry estimates pointed to another drawdown in U.S. crude stockpiles. The euro moved in a tight $1.1355-1.1378 range and Bund yields inched lower, led by the belly of the curve. The pound treaded water as investors monitored London hospital admissions for any signs of an easing in pandemic pressures and questioned how much further the currency can rise when rate hikes are already priced in.Australian dollar edged up amid iron ore hitting a three-month high as heavy rains disrupted southeastern Brazil’s iron ore industry. Japanese government bonds rallied across maturities after a smooth five-year note auction, driving down benchmark 10-year yields from a 10-month high and the yen steadied. BOJ Governor Haruhiko Kuroda said he expects the country’s underlying inflation to pick up gradually over the long-term after moderate near-term gains led by energy prices.

In commodities, crude futures fade a modest push higher. WTI stalls after a test of $82, Brent trades near $84. Spot gold drifts slightly lower near $1,817/oz. Base metals are in the green with LME nickel up 4%. Bitcoin jumped back over $43K while ether was above $3,300.

Looking at the day ahead now, and the aforementioned US CPI release for December will be the highlight. Other data releases include Euro Area industrial production for November and the US monthly budget statement for December. From central banks, the Fed will be releasing their Beige Book, and speakers include BoE Deputy Governor Cunliffe and the Fed’s Kashkari.

Market Snapshot

  • S&P 500 futures up 0.1% to 4,710.50
  • STOXX Europe 600 up 0.5% to 485.30
  • MXAP up 1.6% to 196.29
  • MXAPJ up 1.6% to 641.50
  • Nikkei up 1.9% to 28,765.66
  • Topix up 1.6% to 2,019.36
  • Hang Seng Index up 2.8% to 24,402.17
  • Shanghai Composite up 0.8% to 3,597.43
  • Sensex up 1.0% to 61,200.72
  • Australia S&P/ASX 200 up 0.7% to 7,438.90
  • Kospi up 1.5% to 2,972.48
  • German 10Y yield little changed at -0.04%
  • Euro little changed at $1.1370
  • Brent Futures up 0.5% to $84.17/bbl
  • Gold spot down 0.3% to $1,815.68
  • U.S. Dollar Index little changed at 95.59

Top Overnight News from Bloomberg

  • Bank of France Governor Francois Villeroy de Galhau says the European Central Bank will do what is necessary to get inflation around 2% in the medium term
  • Natural gas prices are likely to remain high for the next two years, with very few options to boost supplies quickly, according to the chief executive of Britain’s biggest energy supplier
  • China’s inflation pressures moderated to 10.3% y/y in December, giving the central bank scope to cut interest rates to cushion the economy’s downturn just as most major nations look to tighten policy

A more detailed look at global markets courtesy of Newsquawk

Asia-Pac bourses traded positively as stocks took their cue from the energy and tech-led gains in the US where sentiment was underpinned as yields eased and focus centred on Fed Chair Powell's confirmation hearing where he noted that the Fed is prepared to act to control inflation if required but refrained from ramping up the hawkish rhetoric. ASX 200 (+0.7%) was led higher by strength in commodity-related sectors after gold made headway above the USD 1800/oz level and WTI crude notched its biggest gain in a month, while the tech sector was also inspired following the growth and duration bias stateside. Nikkei 225 (+1.9%) was underpinned amid the broad constructive mood and recent JPY weakening with Softbank among the top performers after it was reported to have repurchased around JPY 42.9bln of shares during December. Hang Seng (+2.8%) and Shanghai Comp. (+0.8%) also benefitted from the risk momentum with the former spearheaded by tech and energy shares including CNOOC which saw an initial double-digit percentage jump due to the rally in oil prices and after it raised its production guidance for 2022. However, the gains in the mainland were modest in comparison as Chinese property developers face key bond payments this week and with participants digesting softer than expected Chinese inflation data. Finally, 10yr JGBs clawed back yesterday’s losses following a rebound in USTs and despite the heightened risk appetite, while prices briefly stalled after the 5yr JGB auction showed weaker results across all metrics although this was only momentarily with further upside on a break above the 151.00 level.

Top Asian News

  • Asia Stocks Jump to Near 7-Week High After Powell’s Fed Remarks
  • Primavera, ABCI Are Said to Weigh Joining Hong Kong SPAC Race
  • Just Two Listings Priced in Slow Hong Kong IPO Start: ECM Watch
  • China’s Credit Stabilizes as PBOC Calls For More Home Loans

Overall a positive but choppy morning for European cash equities thus far (Euro Stoxx 50 +0.7%; Stoxx 600 +0.6%), with the regional mood underpinned by the upside seen on Wall Street and then across APAC markets. The gains were attributed to Powell refraining from sounding more hawkish, while noise has also been growing regarding the possibility for China to further ease monetary policy amid domestic growth concerns. US equity futures saw some mild selling shortly after the European cash open despite a lack of fundamental catalysts, and with action contained to the equity space – potentially as players take some chips off the table ahead of US CPI and following this week’s gains. Futures are back in modest positive territory at the time of writing, with the NQ (+0.2%) back to narrowly leading and the RTY (-0.1%) the slight laggard. Back to Europe, the region also saw some modest losses in lockstep with state-side futures but mostly remained in positive territory with relatively broad-based gains. The SMI (-0.2%) lags amid the pro-cyclical/anti-defensive nature of the European sector composition, with Healthcare and Food & Beverages at the bottom of the pile – thus exerting some pressure on heavyweights Roche (-1.5%) and Nestle (-0.6%). The sectors table sees Basic Resources, Oil & Gas and Tech towards the top – the former two amid price action in their respective complexes, and the latter tracking the sectoral gains on Wall Street and APAC. Taking a look at some individual movers, Just Eat Takeaway (+2%) and Sainsbury’s (+2%) gain on the LSE following trading updates, with the latter upping its guidance in the pre-market. The other end of the spectrum sees Philips (-14%) plumbing the depths after missing forecasts and reporting higher-than-expected costs. In terms of analyst commentary, Goldman Sachs has conformed to the view that European stocks will outperform this year as the US stocks’ outlook gets dimmer against the backdrop of a hawkish Fed; “The unusually high concentration of stocks within the S&P leaves it more vulnerable to pressures coming from antitrust regulation or higher bond yields”, the analysts said

Top European News

  • Gas Prices to Stay High for Next Two Years, Centrica CEO Says
  • Germany Tells Banks to Rebuild Capital Buffers as Lending Booms
  • Goldman’s Stehn Sees ECB Remaining Patient on Rate Hikes
  • WeTransfer to Kick Off Europe Listing Window With Amsterdam IPO

In FX, the Greenback is hovering off deeper post-NFP lows in advance of CPI data that is tipped to show another acceleration in headline terms, albeit due to base effects on a y/y basis, and could rekindle hawkish Fed policy vibes that were doused somewhat by chair Powell on Tuesday. To recap, at his renomination hearing in front of the Senate Banking Committee he was noncommittal on the timing for tightening and also pushed back on the notion that running down the balance sheet is likely to start soon after, if not immediately following lift-off and the end of tapering. Looking at the Dollar index as a proxy, a partial recovery in early European trade fell a fraction short of 95.700 and 95.500 is holding on the downside as Treasury yields meander between new cycle peaks and overnight retracement troughs awaiting the second leg of this week’s auction schedule in the form of Usd 36 bn 10 year notes alongside rhetoric from former Fed dove Kashkari.

  • CAD - Ongoing strength in crude prices is helping to keep the Loonie aloft, and Usd/Cad is now testing support and underlying bids around 1.2550 as a result. However, the 55 DMA comes in just below the half round number and could stall the fall as WTI encounters some resistance circa Usd 82/brl.
  • EUR/AUD/NZD/CHF/JPY/GBP - All narrowly mixed, marginally softer or off peaks against their US counterpart to be precise, with the Euro easing off after breaching 1.1350 and the 55 DMA on the way to peaking at 1.1378, the Aussie back under the 10 DMA having reached 0.7223 irrespective of softer than expected Chinese inflation metrics and the Kiwi fading from just a few pips shy of 0.6800 ahead of NZ building consents. Meanwhile, the Franc is maintaining 0.9250+ status, the Yen is staying afloat of the 115.50 mark after the BoJ upgraded its outlook for all 9 Japanese regions and Sterling retains a firm grip of the 1.3600 handle even though PM Johnson’s position is looking increasingly precarious as he heads for Question Time at the Commons. Note also, from a technical perspective there are several hurdles for Cable to overcome if its scales 1.3650, as Fibs sit at 1.3675 and 1.3706, while the 200 DMA resides at 1.3737.
  • SCANDI/EM - The Nok has extended gains through 10.0000 vs the Eur in wake of firmer than forecast Norwegian mainland GDP and much less contraction in the overall economy compared to the previous quarter, while the Sek has pared some losses from recent lows with encouragement from news that Sweden plans to offer compensation to households facing higher energy bills to the tune of Sek 6 bn. Elsewhere, the Rub is lagging amidst ongoing angst between Russia and the West and the Try has not really taken on board latest protestations from Turkish PM Erdogan about inflation not matching fundamentals and his promise to lower prices soon. Conversely, the softer Usd in general is propping up the Cnh and Cny following the aforementioned downturn in Chinese PPI and CPI, while the Zar is continuing its bull run regardless of Gold waning beyond Usd 1820/oz, the Czk has more hawkish remarks from CNB’s Mora to lean on and the Brl could also benefit from BCB Governor Campos Neto repeating that further is appropriate.

In commodities, WTI and Brent front-month futures initially gained following a period of consolidation in APAC hours, although recently the benchmarks have drifted off best levels. Prices are underpinned by the softer Buck heading into the US CPI metrics, with the former finding resistance at USD 82/bbl (vs low 81.17/bbl) and the latter extending above USD 84/bbl (vs low 83.52/bbl). News flow for the complex on the lighter side in the European morning. Eyes remain on the US CPI metrics, whilst China’s zero-COVID policy remains as a headwind to global demand, with China halting more flights and China's Tianjin locking down three districts due to the COVID outbreak, whilst the Dalian port also reported cases. From a data perspective, the contracts were little-swayed by the smaller-than-expected draw in Private Inventories, whilst the internals also saw a much larger-than-expected in gasoline stocks (+10.9mln vs exp. +2.4mln) but US NatGas futures remain firmer by some 4% at the time of writing. The EIA STEO yesterday meanwhile upped their 2022 oil prices forecast by almost USD 5/bbl vs last month but sees those levels falling throughout the year. In terms of geopolitics, France has poured some cold water on the recent optimism surrounding the Iranian nuclear deal, suggesting the sides are still some ways apart despite the reported progress. The Russian/Ukrainian front hasn’t seen any further developments thus far. Turning to metals, spot gold has been moving in lockstep with the Dollar and has waned off yesterday’s USD 1,822/oz best, with the downside seeing the 50 DMA (1,806), 21 DMA (1,803) and 200 DMA (1,801) ahead of the psychological USD 1,800/oz. Elsewhere, LME copper inches closer towards USD 10k/t from a USD 9,818/t intraday base, with the softer Dollar and upbeat mood in China spurring prices.

US Event Calendar

  • 7am: Jan. MBA Mortgage Applications 1.4%, prior -5.6%
  • 8:30am Dec. CPI data:
    • 8:30am: Dec. CPI YoY, est. 7.0%, prior 6.8%; MoM, est. 0.4%, prior 0.8%
    • 8:30am: Dec. CPI Ex Food and Energy YoY, est. 5.4%, prior 4.9%; MoM, est. 0.5%, prior 0.5%
    • 8:30am: Dec. Real Avg Hourly Earning YoY, prior -1.9%, revised -1.7%
    • 8:30am: Dec. Real Avg Weekly Earnings YoY, prior -1.9%
  • 2pm: U.S. Federal Reserve Releases Beige Book
  • 2pm: Dec. Monthly Budget Statement, est. -$5b, prior -$191.3b

DB's Jim Reid concludes the overnight wrap

While we’re advertising we have a vacancy in our credit team to work with Craig and myself. We’re looking for a VP level European IG credit strategist. The candidate needs to work in IG credit and is most suitable for someone of 5-8 year experience. Because of HR/compliance procedures applicants have to apply at the following link here a little more on the role can be found. I won’t be able to respond directly to anybody on this. So if you or anyone you know is interested please use the link above.

The highlight of the last 24 hours was Chair Powell’s renomination hearing before the Senate Banking Committee. The overall communicated stance of policy wasn’t much changed with the hawkish pivot still on. Nevertheless, there were a few incremental takeaways. Powell did nothing to push back on liftoff being on the table in March, in line with our US econ team’s call and the increasing probability implied by the market, which is currently 85%. He made it clear that QE (yes it’s still happening) would finish in March, despite speculations it may come to an abrupt halt beforehand. In line with growing consensus, he painted a picture that made the start of QT likely in 2022. Finally, on the overall stance of policy, he emphasised the Fed needs to pull back from extreme levels of accommodation, but didn’t need to rush to get to a neutral stance of policy.

All told, yields did rally with Powell after earlier climbing. Yields on 2yr Treasuries decreased -1.2bps while the 10yr dipped -2.5bps, with the bulk of declines again coming later in New York trading hours. All this ahead of the all-important December US CPI print later today? The print comes out at 13:30 London time, and as you’ll be familiar with by now, repeated upside surprises in the inflation data have sent the year-on-year numbers up to multi-decade highs, putting significant pressure on the Fed. Indeed if you look at the monthly headline CPI reading, 7 of the last 9 releases have come in above the consensus estimate on Bloomberg. In terms of what to expect this time around, our US economists think that year-on-year CPI will rise to +7.0%, which will be the highest annual CPI number since 1982. And if that figure is realised, it would also mean that the real Fed Funds rate in December was around -7%, which for reference is lower than at any point in the 1970s, when the lowest the fed funds rate got in real terms was around -5%.

Over in equity markets, US indices were buoyed by rates rallying, paring back their initial losses as Powell spoke. The S&P 500 was on track for a 6th consecutive loss for the first time since February 2020, before recovering its poise and ending the day up +0.92%, it’s first day in the green since the first trading day of the year. Sector dispersion was wide, as energy (+3.41%) saw a noticeable outperformance as Brent Crude (+3.52%) closed above its pre-Omicron closing level for the first time, reaching $83.72/bbl, just as WTI (+3.82%) also posted a decent advance. Meanwhile tech stocks continue to be the beneficiary of the calm in rates following their slump last week, with the NASDAQ surging +1.41% and the FANG+ index gaining +1.53%.

European equities had a strong day themselves yesterday, although to be fair they were catching up with the rally late in the US session they’d previously missed out on, with the STOXX 600 up +0.84%. The moves were enough to put the DAX (+1.10%) and the CAC 40 (+0.95%) back in positive territory on a YTD basis, and the continued rise in yields helped the STOXX Banks index (+0.28%) match a 3-year high set last Friday. Speaking of yields, there was generally a move higher across Europe yesterday, with those on 10yr bunds (+0.7bps), OATs (+1.6bps) and BTPs (+2.0bps) all rising, although gilts (-2.0bps) were the exception.

Markets across Asia are seeing a significant rally this morning led by gains in the Hang Seng (+2.12%) followed by the Nikkei (+1.85%) and Kospi (+1.39%). Elsewhere, in China, the Shanghai Composite (+0.35%) and CSI (+0.36%) are trading in the green, after the nation's consumer and producer inflation both moderated leaving room for the PBOC to ease monetary policy. With the inflation remaining subdued, the possibility of a rate cut in China would put the PBOC on a divergent path with the US Fed. Data released earlier revealed that producer prices advanced a less than expected +10.3% y/y last month while consumer prices (a key gauge of retail inflation) increased +1.5% y/y down from 2.3% in November, also short of economists’ forecasts (1.7%). Looking ahead, equity futures are indicating a steady start in DMs with the S&P 500 (+0.06%) and DAX (+0.55%) contracts trading in positive territory.

Turning to Covid, there were further signs yesterday that the Omicron wave in the UK was easing, which is potentially significant more broadly in that it was one of the first places among the advanced economies to be affected, particularly in London, and given that it has seen fairly light social restrictions. Yesterday saw the number of reported Covid cases fall to the lowest since December 27, and in England the number of patients on a mechanical ventilator fell to its lowest in almost 3 months as well, which backs up the argument that Omicron appears to be a milder form of Covid relative to previous variants.

In more DB advertising, we’ve just published the latest edition of The House View, a compilation of DB’s macro and strategy views in slide format. You can find the link here. In addition, in a new Podzept podcast, Tim Rokossa, Global co-ordinator of Automotive research, and Luke Templeman, discuss the 2022 outlook for the global automotive sector. Here’s the podcast (link here) and the associated report (link here).

There wasn’t much at all in the way of data yesterday, though the NFIB’s small business optimism index for December in the US rose to 98.9 (vs. 98.7 expected).

To the day ahead now, and the aforementioned US CPI release for December will be the highlight. Other data releases include Euro Area industrial production for November and the US monthly budget statement for December. From central banks, the Fed will be releasing their Beige Book, and speakers include BoE Deputy Governor Cunliffe and the Fed’s Kashkari.

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