Futures Reverse Overnight Rout As Doubts Emerge About Aggressive Fed Hiking

After initially sinking sharply, with S&P futures dropping as much as 1% overnight on concerns that aggressive rate hikes from the Fed aimed at curbing stubbornly high inflation could plunge the US into recession and crash risk assets, US equity futures have recovered most of their losses after an overnight article from Bloomberg reported that the “Fed Doesn’t Yet Favor a Half-Point Hike or an Emergency Move” easing investor nerves that a massive hike is imminent. Contracts on the Nasdaq were also flat after earlier retreating as much as 1.2% as growth stocks are especially sensitive to rising rates and bond yields. Still, absent a powerful bounce today, the S&P 500 is set to snap a two-week winning streak.

The benchmark S&P 500 has struggled to gain for three weeks in a row since November as the Fed signaled it was prepared to tighten monetary policy to rein in red-hot inflation, but strategists say a broader selloff across stock markets is unlikely. Helping ease the overnight selling panic, the selloff in sovereign bonds eased, with the 10-year Treasury yield falling about three basis points  to hover around the 2% level. The two-year yield was little changed after jumping the most since 2009 on Thursday. Bonds across Europe were mixed, with Germany’s 10-year yield dropping two basis points. The dollar rose and bitcoin rebounded from Thursday lows.

“With seven Fed hikes (one per meeting) virtually priced in now, interest rate expectations cannot get much more hawkish before the March meeting. This should allow markets to stabilize in coming weeks,” said Andrea Cicione, head of research at TS Lombard in London.

Overnight, Goldman poured more gasoline on the rate hike fire when it again revised its rates forecast and now sees the Fed raising rates seven times this year to contain inflation, up from the five increases it previously anticipated, and in line with market expectations. That’s a 25 bp hike at every meeting left on the calendar this year. Traders also expect 175 bps of tightening by the end of 2022, with almost 50 bps priced in for March.

In premarket trading, Didi’s U.S.-listed shares fell after Tencent said that it hasn’t bought stock in the ride-hailing firm since it went public. Zillow shares jumped 14% after reporting earnings that beat the highest expectations. The company’s goal of becoming the “housing super app” is welcomed by investors. Here are the other most notable premarket movers:

  • Expedia (EXPE US) shares gained 5% in postmarket trading on Thursday, after the online travel agency reported adjusted fourth-quarter earnings that beat expectations.
  • Freshworks (FRSH US) dropped 6.5% postmarket after the software company’s full-year loss per share forecast missed the average analyst estimate at the midpoint. The company also noted that all remaining shares subject to lockup agreements will become eligible for sale as of Monday.
  • Shares of buy-now, pay-later firm Affirm Holdings (AFRM US) slump 10% in U.S. premarket trading, a day after its worst decline on record.
  • Dexcom Inc. shares dropped 3.9% in the postmarket after the glucose monitor manufacturer forecast FY22 revenue that missed the average analyst estimate.
  • Yelp shares gained 4.3% in extended trading on Thursday, after the online review site reported fourth-quarter revenue and adjusted Ebitda that beat expectations. It also gave a full-year forecast for adjusted Ebitda.
  • Bloom Energy (BE US) shares rose 8.8% postmarket after the power equipment maker beat analyst revenue and profit estimates.
  • Avalara (AVLR US) shares jumped 4% in postmarket trading after the company forecast revenue for the first quarter that beat the average analyst estimate.

European equities fell alongside US equity futures, with real estate, tech and health care the worst performing sectors. Most Stoxx 600 sectors are in red with the broader Stoxx 600 Index down 0.8%, with technology stocks underperforming as their earnings projections suffer from higher interest rates. DAX outperforms dropping 0.8%, while the FTSE MIB lags dropping 1.4%. Among individual stocks, Mercedes-Benz AG outperformed after exceeding its profitability target last year  Here are some of the biggest European movers today:

  • Tate & Lyle shares jump as much as 10%, the most since March 2020, after the company provided a 3Q sales update that Jefferies called “reassuring.”
  • Mercedes-Benz Group gains after the carmaker reported preliminary FY21 results, including adjusted returns on sales at its cars and vans segment of about 12.7%, exceeding guidance.
  • BMW rises as it says it sees positive one-time effect in the financial result of EU7 billion to EU8 billion following the increase of its stake in Chinese BMW Brilliance Automotive joint venture.
  • Boliden rises, continuing a week-long rising streak, after posting 4Q earnings that included a beat on EPS. DNB notes operations and mining volumes were “much ahead of expectations.”
  • Sweco shares rise the most since November 2020, after the company presented its fourth-quarter earnings that included operating profit beating analyst expectations.
  • Ipsen shares rose as much as 5.9% after the French drugmaker gave 2022 guidance that Bloomberg Intelligence says is likely to lead to upgrades to consensus.
  • Delivery Hero shares drop as much as 13%, extending Thursday’s record plunge, as more analysts cut their price targets after the company published an underwhelming 2022 outlook.
  • Volvo Cars falls after posting 4Q earnings, which included a miss on operating income, which dropped 24% y/y. Kepler Cheuvreux notes semiconductor shortage will continue to impact the auto maker.
  • Fresenius Medical Care shares drop 5.1% after Jefferies downgraded the stock to neutral, saying the company “may not be not over the worst,” citing an update of mortality data.
  • Naturgy shares slid 10%, the most since March 2020, after the company announced plans to split its infrastructure unit from the energy business.

Asian stocks dropped after an unexpectedly large surge in U.S. inflation caused a spike in Treasury yields, hammering growth shares with rich valuations. The MSCI Asia Pacific ex-Japan Index declined as much as 1.2%, the most in two weeks, with technology names like Tencent, Meituan and Infosys the biggest drags on the gauge. Smaller, tech-heavy indexes were big losers in South Korea and Hong Kong. Markets in Japan were shut for a holiday. Friday’s losses spoil what has otherwise been a positive week for Asian stocks, helped by an advance in China following the market’s return from the Lunar New Year holidays. The CSI 300 Index rose and is on course for its best week in two months after Chinese state-backed funds were said to have bought local stocks earlier. The broader Asian equity gauge including Japan looks poised to beat the S&P 500 Index for a second straight week. “Now that the Fed has to tighten quite a bit more aggressively to slow down this inflation, I think it does increase the recession risks,” said Rajeev de Mello, a global macro portfolio manager at GAMA Asset Management, said in a Bloomberg TV interview. “But within risky assets, I like Asia on a relative basis because it has been cheap.” Equities in Hong Kong and on the mainland also fared better as data late on Thursday showed Chinese banks extended a record amount of loans in January, providing a boost to a slowing economy

Australian stocks declined most in two weeks: the S&P/ASX 200 index fell 1% to close at 7,217.30, marking its biggest drop since Jan. 27. Regional stocks retreated after a surprise jump in U.S. inflation increased bets on accelerated Federal Reserve interest-rate hikes. Insurance Australia was among the top performers after raising its forecast for gross written premiums. Zip had one of the biggest declines after peer Affirm forecast quarterly revenue that missed analysts’ estimates.  In New Zealand, the S&P/NZX 50 index fell 1.9% to 12,173.78.

India’s benchmark share index fell, in line with Asian and European peers, dragged down by further declines in information technology firms.  The S&P BSE Sensex dropped 1.3% to close at 58,152.92 in Mumbai, while the NSE Nifty 50 Index also dropped by an equal measure. The key gauges fell 0.8% each for the week, their third retreat in four weeks. All of the 19 sector sub-indexes compiled by BSE Ltd. slipped.  A gauge of information technology companies has fallen 9.4% this year, the most among sector indexes in India.  Foreign funds have been net sellers of Indian equities since the end of September, taking out more than $10 billion. They have sold $850 million local stocks this month through Feb. 9, while Thursday’s provisional numbers showed further selling of 17.3 billion rupees ($231m). Out of the 45 Nifty 50 companies that have reported quarterly numbers so far, 25 either met or exceeded analyst estimates, 18 missed and two can’t be compared. Generic drug maker Divi’s Laboratories was the latest to report December quarter earnings ahead of analysts’ view.  “With earnings season winding down, investors will turn their attention back to macroeconomic concerns, with special focus on inflation numbers,” Mitul Shah, head of research at Reliance Securities, said in a note. Infosys contributed the most to the Sensex’s decline, decreasing 2.7%. Out of 30 shares in the Sensex index, 25 fell while 5 traded higher

In rates, Treasury yields are mostly lower, led by long end, paring less than half of Thursday’s surge, with the 10Y hovering around 2.00% after hitting 2.05% on Thursday and enduring their worst start to a year in more than four decades; front-end yields are little changed, long-end yields richer by ~4bp; 2s10s breached 40bp, 5s30s 32bp. Key curve spreads reach new multimonth lows. Fed is slated to announce final monthly purchase schedule at 3pm ET, expected to taper to $20b Treasuries and $10b MBS.  Overnight index swaps price in ~45bp of policy rate increase for the Fed’s March meeting, ~170bp for December FOMC meeting. IG dollar issuance slate empty so far. Bund and Treasury curves bull flatten. Peripheral spreads widen to Germany with 10y BTP/Bund widening 5.9bps.

In FX, the Bloomberg Dollar Spot Index initially advanced for a second day as the greenback was higher against most of its Group-of-10 peers and commodity-linked currencies led declines, however as US traders walked in the BBFXY dipped into the red. The euro fell a first day in three to touch a one-week low of $1.1370. The German sovereign yield curve bull flattened while Italian notes sold off as markets priced in an earlier end to the ECB’s bond purchases. The pound hovered and short-dated Gilts fell as traders fully priced an unconventional half-point interest-rate hike from the BOE, betting that policy makers will front-load tightening to maintain credibility on inflation. Australian and New Zealand dollars underperformed their Group-of-10 peers amid further repricing of the greenback after surging inflation spurred expectations of aggressive Federal Reserve rate hikes. RBA Governor Lowe’s comments curbed gains in Aussie bond yields after saying he’s prepared to tolerate inflation above the upper end of his 2-3% target range, reinforcing signals that Australia’s first interest-rate increase remains some way off.

In commodities, crude futures advance. WTI trades within Thursday’s range, adding 0.5% to trade near $90.31. Most base metals trade in the red; LME copper falls 2.6%, underperforming peers. Spot gold is little changed. Crypto markets remain relatively contained, in-fitting with APAC trade; Bitcoin -0.6%.

Looking at the day ahead now, and data releases include UK GDP for Q4, whilst in the US there’s also the University of Michigan’s preliminary consumer sentiment index for February. Otherwise, central banks speakers include the Fed’s Barkin, and the ECB’s Elderson and Visco, and the Central Bank of Russia will be making its latest policy decision.

Market Snapshot

  • S&P 500 futures down 0.6% to 4,471.00
  • MXAP down 0.6% to 190.50
  • MXAPJ down 0.9% to 625.27
  • Nikkei up 0.4% to 27,696.08
  • Topix up 0.5% to 1,962.61
  • Hang Seng Index little changed at 24,906.66
  • Shanghai Composite down 0.7% to 3,462.95
  • Sensex down 1.2% to 58,237.49
  • Australia S&P/ASX 200 down 1.0% to 7,217.27
  • Kospi down 0.9% to 2,747.71
  • STOXX Europe 600 down 1.2% to 466.62
  • German 10Y yield little changed at 0.26%
  • Euro down 0.3% to $1.1392
  • Brent Futures up 0.4% to $91.78/bbl
  • Gold spot up 0.0% to $1,827.00
  • U.S. Dollar Index up 0.34% to 95.88

Top Overnight News from Bloomberg

  • Federal Reserve officials are in no rush to raise interest rates prior to their scheduled policy meeting next month, nor is a half percentage-point move in March yet likely, despite a bigger-than-expected jump in consumer prices that stoked speculation about such options
  • The U.K. economy expanded at the fastest pace since World War II last year after suffering a milder hit than expected in December. The 7.5% expansion was the largest since 1941 and made Britain the fastest-growing advanced economy in 2021
  • Raising interest rates “would not solve any of the current problems,” ECB President Christine Lagarde told Redaktionsnetzwerk Deutschland in an interview released on Friday. “On the contrary: if we acted too hastily now, the recovery of our economies could be considerably weaker and jobs would be jeopardized”
  • The European Commission’s financial services head insisted that U.K. clearinghouses will get no further access to the bloc’s markets after 2025, knocking back the Bank of England governor’s calls for an indefinite trade route into the European Union

A more detailed look at global markets courtesy of newsquawk

Asian stocks declined after hot US CPI and hawkish Bullard comments fuelled expectations for 7 Fed hikes this year. ASX 200 (-1.0%) was pressured with the tech sector suffering the brunt of the higher yield environment. Nikkei 225 was closed. Hang Seng (-0.1%) and Shanghai Comp. (-0.7%) were also subdued but with losses in the mainland stemmed after stronger than expected Aggregate Financing data from China and with press reports speculating that the PBoC could ease again next week.

Top Asian News

  • Hong Kong Seeks China’s Help; Protests Spread: Virus Update
  • Softbank Tells U.S. Judge It Will Resist Credit Suisse Subpoena
  • Hong Kong’s New Covid Rules Face Resistance From Weary Public
  • China Developers Jump After Reports on Presale Fund Use

European bourses are pressured, Stoxx 600 -0.8%, after a negative US close on hot-CPI was exacerbated by further hawkish Fed speak/speculation. Sectors within Europe are all in the red though Tech lies as the clear laggard amid rate expectations. US futures are in-fitting with their European peers with the NQ -0.8%, modestly underperforming.

Top European News

  • Blinken Says Asia is Watching; Saab Orders Up: Ukraine Update
  • U.K. Covid Rebound Sees Best Annual Growth Since World War II
  • Germany Final Jan. Consumer Prices Rise 0.4% M/m, Est. +0.4%
  • Half-Point BOE Rate Increase Looks a Done Deal for Traders

In FX, the buck boosted by hawkish rate rise and balance sheet reduction preferences from Fed’s Bullard. Aussie undermined as risk sentiment sours amidst heightened inflation concerns, but RBA Governor remains patient. Euro recoils after another effort to manage hyper market tightening expectations by ECB President Lagarde. Rouble unable to benefit from 100 bp CBR hike as geopolitical angst rumbles on. CBR Key Rate (Feb) 9.50% vs. Exp. 9.50% (Prev. 8.50%); if situation develops in-line with the baseline forecasts they hold open the prospect of further hikes in coming meetings. Key Rate Forecast (2022): 9.0-11.0% (prev. 7.3-8.3%).

In commodities, WTI and Brent are firmer in an attempt to recuperate from yesterday’s pressure as the overall geopolitical situation remains tense. US President Biden said he will work to bring gas prices down and strengthen supply chains to bring the cost of energy and goods down, according to the White House. IEA OMR: Global oil supply 98.7mln BPD (+560k BPD); oil market is still set to shift to a surplus in Q2/H2-2022. OPEC+ effective spare capacity could fall to 2.5mln BPD (prev. 5.1mln BPD) by end-2022. Spot gold and silver are continuing to err lower though the yellow-metal has settled just above the 21-DMA at 1819/oz. Brazilian miner Vale Q4 iron ore production at 82.47mln tons and its 2021 iron ore output reached 315.61mln tons

In fixed income, bonds licked some wounds post-hot US inflation metrics, but curves stay flat amidst heightened Fed tightening expectations. UST yields still elevated as 2022 FOMC voter Bullard gets aggressive and mentions inter-meeting moves and 100 bp hikes by end H1. BTPs bogged down by issuance and hardly helped by Italy’s Treasury Debt chief claiming no significant selling. Italian Treasury Debt Head says they have not seen significant selling trend in Italian gov’t bonds; says a hike in interest rates will reflect on the average cost of debt very slowly. Italy’s average cost of debt will continue below nominal growth rate.

In geopolitics:

  • Russian Kremlin envoy Kozak said there were no results at the meeting that could be transformed into an agreement and they hope that Ukraine is wise enough not to start military action against its own citizens, according to Reuters.
  • Russia’s Kremlin notes that yesterday’s 4-Nation (Normandy) talks regarding Ukrainian tensions yielded no results.
  • Ukraine’s Head of the Presidential Office Yermak said all parties confirmed they are ready to continue  negotiations but could not agree on signing of a document in Berlin, while he added everyone expressed support for the cease-fire and there is a will to continue negotiating in Russia talks, according to Reuters.
  • US President Biden said Americans should leave Ukraine now and that things could turn crazy very quickly, while the State Department also issued an advisory that Americans should depart Ukraine now, according to Reuters.
  • US Secretary of State Blinken says they continue to see very troubling signs re. Russian escalation over Ukraine, continues to draw down its embassy in Ukraine, an invasion of Ukraine could occur at any point, including during the Beijing Olympics; notes new forces are arriving near the border.
  • NATO Secretary General Stoltenberg says they are assessing if longer-term presence in the eastern-flank is needed.

US event calendar

  • 10am: Feb. U. of Mich. 5-10 Yr Inflation, prior 3.1%
  • 10am: Feb. U. of Mich. 1 Yr Inflation, est. 5.0%, prior 4.9%
  • 10am: Feb. U. of Mich. Expectations, est. 64.5, prior 64.1
  • 10am: Feb. U. of Mich. Current Conditions, est. 72.1, prior 72.0
  • 10am: Feb. U. of Mich. Sentiment, est. 67.0, prior 67.2

DB’s Jim Reid concludes the overnight wrap

What a day we had yesterday with the blockbuster US CPI release (full round up later). Indeed the 7.5% YoY print (vs 7.2% expected) even raised the small possibility of the first intermeeting Fed rate hike since 1994, and before that since 1979. It also raises the risk that a recession might be increasingly difficult to avoid. Indeed the worry I had in last month’s chart book “The road to the next Recession” (link here) was that this was going to be a much shorter, more boom bust US cycle than the last four super long ones with a US recession by H1 2024 a strong possibility. The theory was that the Fed was way behind the curve and that by around the turn of 2022 the 2s10s curve would invert (it almost always flattens in a hiking cycle) and start the timer clock for a recession 12-18 months later. With the surging US CPI print yesterday the risks have to be skewed towards the US curve inverting even earlier than that and starting the countdown clock earlier.

Indeed our US economists yesterday moved up their US Fed call to a 50bps hike in March plus five more 25bp hikes in 2022, a hike at all but the November meeting, and totalling 175bps in 2022. They also highlight the increasing risk of a 2023 or 2024 recession. See their note here. I can’t help wondering what future historians will make of the Fed still doing QE when inflation was 7.5%? Clearly forward guidance is a useful tool when you have uncertainty but around regime change it can prove a nightmare. For several months we’ve had to wait patiently until March to start the fight against inflation when in previous eras, when every meeting would have been live, rates would have likely been hiked many meetings ago.

Interestingly the market now prices some risk of an emergency hike before March. Fed funds futures for the month of February finished the day at 12.5bps, despite the fed funds rate printing at 8bps everyday so far in February, implying some small probability that the Fed will raise rates between now and the end of the month. The intermeeting hike furore reached its zenith with comments from Regional Fed President Bullard, a voter on the FOMC this year. After the CPI print and the Europe close Bullard said, “There was a time when the committee would have reacted to something like this to having a meeting right now and doing 25 basis points right now”, adding “I think we should be nimble and considering that kind of thing.” Bullard also mentioned a preference for having 100bps of rate hikes done by July, which is in line with our US econ team’s updated call. At the other end of the spectrum, San Francisco Fed President Daly, not a voter this year, preferred not to send a strong signal that liftoff would be 50bps in March. The view of most voters probably falls somewhere between the two.

Bullard’s remarks helped accelerate the policy repricing that had already begun after CPI. The probability of a 50bps hike in March rose to 80%, which was up from 29% at the close the previous day, and earlier briefly priced in more than a 100% chance of a 50bp hike during Bullard’s remarks. This growing conviction in the odds of future tightening could be seen beyond March as well, with 114bps worth of hikes now priced in by the July meeting, crossing 100bps for the first time, which would imply back-to-back hikes until then if the Fed were to move in 25bp increments. And looking at the year as a whole, futures are now pricing in 6.6 full hikes by the December meeting (5.5 previous close), which is more than double the 2.96 hikes expected at the end of 2021, which let’s not forget was only six weeks ago today.

When it came to rates yesterday, that CPI report was the catalyst to finally push 10yr Treasury yields above 2% for the first time since August 2019, with a +10.8bps rise on the day seeing it close at 2.05%. The move was driven predominantly by real rates, as real 10yr yields increased +8.3bps. However, the big story of the day was the much sharper moves at the front-end as investors priced in a more aggressive Fed. The 2yr yield rose an astonishing +21.4bps on the day to 1.58%, the largest daily increase since June 2009, meaning that the 2s10s curve reached its flattest since August 2020, at just 44bps. For those of us warning about recessionary signals, that’s an ominous sign given that the 2s10s curve has inverted prior to every single US recession in recent decades.

That move in rates was echoed in Europe. Yields on 10yr bunds (+7.0ps), OATs (+8.2bps) and gilts (+9.5bps) all rose to fresh highs, and in line with the pattern over recent days, that coincided with another widening in peripheral spreads, with the gap between 10yr Italian yields over bunds up +6.9bps to 161bps, the biggest since June 2020. The big difference to the US though was that European curves steepened as the front end was anchored by a lift-off in Europe that still seems beyond the immediate horizon. Having said that 5.010bp hikes are priced in now vs 4.3 the night before.

With the sharp repricing toward tighter Fed policy, US equities marched lower throughout the day, with the S&P 500 falling -1.81%, every sector finished lower and the VIX increased +4.0pts to 23.9pts. Interest rate sensitive sectors led the declines, and in line with this the NASDAQ fell -2.10%. Over in Europe, the STOXX 600 (-0.21%) saw smaller losses, and a number of indices including the DAX (+0.05%) and the FTSE 100 (+0.38%) actually moved higher on the day. They all closed before the bulk of the US sell-off though.

In terms of the headlines from the release, (Our US econ team’s full wrap here) the monthly CPI print came in at +0.6% in January, which was a slight acceleration from the December reading if you look at the second decimal place, and went against the consensus expectation of a deceleration to +0.4%. That now marks the 9th time in the last 11 releases that the monthly headline has come in above the Bloomberg consensus, and pushed up the year-on-year number to a post-1982 high of +7.5% (vs. +7.3% expected). Core also surprised on the upside, with a monthly gain of +0.6% (vs. +0.5% expected), sending the annual rate up to +6.0% (vs. +5.9% expected). Our economists now have headline CPI peaking at +7.7% in February and have headline inflation at +4.1% at the end of the year. They have core CPI peaking at +6.4% in March, and ending the year at +3.9%.

What should concern the Fed is how broad this inflation is getting – trimmed mean CPI (which cuts out the biggest prices moves in either direction) came in at +0.63%, which is the second highest on record going back to 1983, and rents (+0.54%) had their strongest monthly gain since 1992. Rents have followed our model nicely over the last 9 months. See it on page 18 of the chart book linked at the top. A big hat tip to DB’s Francis Yared who first alerted me to the upcoming rents issue last summer.

Talking of Francis, his team updated their rates views yesterday (link here), and now see the 10yr Treasury yield rising to 2.5% in Q3 (from 2.4%), along with the 10yr bund yield moving to 0.8% that quarter as well.

Asian equities are turning down as I type with the Shanghai Composite (-0.22%), Hang Seng (-0.60%) and Kospi (-0.92%) now lower after a brighter start. Elsewhere, markets in Japan are closed for a holiday today. Moving ahead, US equity futures are extending losses this morning with contracts on the S&P 500 (-0.87%) and Nasdaq (-1.04%) moving lower again. The Euro has fallen -0.3% overnight after a German magazine published an article where Lagarde warned that if the ECB went too fast it would threaten the recovery. She again reiterated that the US and UK have a different situation to the Euro Area.

Back to yesterday and the one respite from the highest inflation in decades was in commodities. Despite increasing as much as +1.69% intraday to $93.10/bbl, Brent crude ended the day -0.12% lower at $91.44/bbl. The turn in oil coincided with the turn in equities, as perhaps the reality of a hard landing hit risk sentiment. Industrial metals were the only part of the commodity complex in the green, with copper (+1.94%) at its highest since October.

Elsewhere on the data front yesterday, the US weekly initial jobless claims for the week through February 5 fell for a 3rd consecutive week to 223k (vs. 230k expected).

To the day ahead now, and data releases include UK GDP for Q4, whilst in the US there’s also the University of Michigan’s preliminary consumer sentiment index for February. Otherwise, central banks speakers include the Fed’s Barkin, and the ECB’s Elderson and Visco, and the Central Bank of Russia will be making its latest policy decision.

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