*
Main U.S. indexes advance: Nasdaq up ~1.5%
*
Tech leads sector gainers, energy sole loser
*
Dollar, gold, bitcoin decline; crude rallies
*
U.S. 10-Year Treasury yield edges down to ~3.72%
Welcome to the home for real-time coverage of markets brought to
you by Reuters reporters. You can share your thoughts with us at
DISINFLATION AND A SOFT LANDING? NOW, ABOUT THAT GOLDILOCKS
SCENARIO... (1248 EST/1748 GMT)
Markets may have gotten too optimistic on continuing
disinflation and the likelihood that the Federal Reserve will
engineer a soft landing for the U.S. economy, and that
goldilocks’ scenario may soon face a reckoning, according to Tom
Fitzpatrick, chief technical strategist at Citigroup.
“Right now, the “Goldilocks” narrative is clearly in the
ascendancy. The Fed has stuck with its terminal target. The
market has now got on the same page as the Fed both in terms of
the terminal rate and the possibility of a soft landing,”
Fitzpatrick said in a note.
But this rosy view ignores several warning signs. These
include services inflation at a trend high of 7%, the Employment
Cost Index (ECI) at a trend high of 5.1%, the Atlanta Fed wage
tracker index at 6.1% and the estimate of wage increases for
people who leave for another job at 7.3%, while the JOLTS quit
rate is also high at 2.7.
“We are now meant to believe that as inflation has
transitioned from Headline inflation to the pass through effects
of Core inflation to the pass through effects of wage and
Services inflation (ECI is at the trend high of 5.1% and
services inflation is at the trend high of 7%) that this
pervasive and sticky inflation is just going to melt
away?...History begs to differ,” Fitzpatrick said.
Meanwhile, investors may have also gotten complacent on
commodity prices. European gas prices have fallen but anecdotal
stories of energy bills in Europe and the United Kingdom show
increases of 200% and 300% and it will be hard for these to
fall, Fitzpatrick said.
Oil prices are up around 14% from their December low and
look likely to continue rise, with Fitzpatrick seeing the
likelihood of an approximate 33% rally over the next 4-5 months
while gasoline, soft commodities, grains and industrial metals
are also gaining.
“For Energy and Commodities in general to have moved higher
again when inflation is still significantly elevated above
target (let us not forget that that 2% target is for headline
inflation) you are in danger of seeing that vicious cycle
re-emerge again when the job is not done,” Fitzpatrick said.
“This is one of the things that derailed the Fed in Q1, 1974
when they were attempting to end their tightening cycle. That
ultimately led to 400 bp’s in rate rises from March to May
1974.”
Meanwhile bond yields are “starting to look perky again.”
Fitzpatrick thinks that markets will be forced to price for a
terminal rate of 5.75% to 6%, above current expectations of 5%
to 5.25%, and two-year Treasuries are likely to lead yield
increases.
Stock markets are also showing similarities to the backdrop
of 1973-1974, when they posted sharp losses as the Fed raised
rates.
Fitzpatrick concludes that while “the goldilocks narrative
is alive and well – for now,” it is unlikely to last. “At best I
suspect it could last into late into Q1 and even that could be
too optimistic.”
(Karen Brettell)
*****
LOW QUALITY LEADERSHIP HAS SOME RUNNING, OTHERS REJOICING
(1222 EST/1722 GMT)
The equity derivatives sales team at RBC Capital Markets is reporting that they’ve been debating recently with investors the significance of the low quality leadership seen in the U.S. equity market.
Lori Calvasina, RBC's head of equity strategy, takes a look at the issue and notes that the low quality leadership seen within the Russell 1000 and Russell 2000 indexes has emerged across a number of factors. According to Calvasina, low ROE, negative earners, high leverage, low market cap, and high short interest have been outperforming within both large cap and small cap in recent months.
However, Calvasina says that bursts of low quality leadership are usually seen starting midway through a recession or shortly after one concludes. "Rightly or wrongly, what recent low quality leadership is telling us is that the stock market has been acting as if October were the low associated with the current period of economic challenge." In this context, Calvasina is not paying much attention to protests that short covering has been pushing stocks higher this year.
"That’s normally the case when markets start the process of
climbing off recession lows."
(Terence Gabriel)
*****
THE CPI FOLLIES: MONTHLY FIGURES SEEN GAINING HEAT, BUT
EXTENDING ANNUAL COOLING TREND (1045 EST/1545 GMT)
For well over a year now, market participants and economists
have scarcely seen a day go by without the dreaded "i-word"
being tossed around like a Frisbee.
Post-pandemic demand went to the races, nearing its first
lap even as the supply chain was lacing up its running shoes.
This state of affairs launched prices to the moon, and
prompted the Federal Reserve to turn from doves to hawks,
exchanging words like "transitory" to "sticky" and ratcheting
its policy rate from near zero to 4.75% within a year, all in an
effort to toss cold water on demand and cool inflation down with
it.
All of which sets the state the Labor Department's Consumer
Price Index (CPI) report for January , due an hour
before the opening bell on Tuesday.
The monthly numbers are seen moving in the wrong direction,
with a spike in gasoline prices likely to have driven the
headline number up 0.5% from December's revised 0.1% increase.
Stripping out volatile food and energy prices, the core CPI
measure is expected to repeat the prior month's 0.4% print.
A note from Bank of America Securities Global Research
breaks it down, saying AAA's data suggests a 4.4% jump gasoline
fueled a 2% surge energy prices, with food prices rising by
0.3%.
Just in the last week, gasoline demand rose 1.7%, with
consumption touching levels last seen in mid-December, according
to Patrick Dean, head of petroleum tracking at Gasbuddy.com,
which tracks fuel prices across the country.
Year-on-year CPI, which irons out seasonal volatility, the
picture is more pleasant, with headline and core readings
cooling down to 6.2% and 5.5%, respectively.
"Any core reading under 5.5% would likely be a short-term
upward catalyst for stocks and any reading above 5.5% would
likely be viewed negatively by the markets over the very
short-term," writes George Ball, chairman of Sanders Morris
Harris.
CPI will be the second major inflation reading for the month
of January, following the blowout jobs report released by the
same agency on Feb. 3, which showed wage growth cooling down to
a still-hot 4.4%.
Here's a look at major U.S. inflation indicators, and how
far they've yet to fall before approaching Powell & Co's average
annual 2% target:
Sharp observers will note that core CPI has been hotter than
wage growth since December 2021, meaning "real" wages have been
headed south for well over a year, a scenario which bodes ill
for an economy that derives about 70% of its GDP from consumer
spending.
The graphic below offers a price breakdown of select
consumer essentials compared with hourly earnings growth (energy
prices have been conspicuously omitted for considerations of
scale):
Adding more uncertainty to the mix, the Labor Department is
expected to incorporate a new weighting scheme, as outpointed by
BoA.
"This will mark the start of BLS updating CPI weights every
year using a single year of spending data instead of every two
years using two years of spending data," according to BoA
economists Stephen Juneau and Michael Gapen. "While we do not
expect the new weights to change the outcome materially, it
could add or subtract a few bps from our headline and core
forecasts."
(Stephen Culp)
*****
QUIET START AFTER A SLUGGISH WEEK (0956 EST/1456 GMT)
Major U.S. indexes are modestly higher in the early
stages of trading, with the Nasdaq coming off its first weekly
decline, and the S&P 500 its biggest weekly percentage decline
of the year last week, as investors tread lightly ahead of a key
inflation reading on Tuesday.
A dearth of economic data on Monday shifts the focus to
Tuesday's Consumer Price Index (CPI) reading for January.
Expectations call for a CPI to decrease to 6.2% on an annual
basis versus the prior 6.5% reading, while the month-over-month
reading is seen as rising by 0.5%, according to economists
polled by Reuters. On a core level, CPI is expected to slow to
5.5% annually from 5.7% but tick up by 0.4% from 0.3% on a
monthly basis.
The reading will help shape views for the path of the Federal Reserve's path of interest rate hikes as the central bank continues to try and quell high inflation. On Monday. Fed Governor Michelle Bowman said the central bank will need to continue to raise interest rates in order to get them high enough to reduce inflation to the Fed's target level of 2%.
Still, nearly all of the 11 major S&P sectors are higher, with the exception of energy . Tech is leading the way higher. Russell 1000 Growth is outperforming Russell 1000 value as U.S. yields are subdued.
Below is your market snapshot:
(Chuck Mikolajczak)
*****
S&P 500 FUTURES: FENCED IN BY FIBONACCI (0900 EST/1400 GMT)
E-mini S&P 500 futures appear to be using a number
of tightly packed Fibonacci retracement levels as support and
resistance. A range breakout may tip the balance:
After hitting an intraday high of 4,208.50, and ending at
4,191.50, on February 2, the futures stalled. This as they
battled the 76.4%-78.6% Fibonacci retracement zone of the
August-October leg down in the 4,178.61-4,197.15 area, the
September 13 high at 4,208.00, and the 23.6% Fibonacci
retracement of the March 2020-January 2022 advance at 4,215.08.
EScv1 sold off around 3.5% over the next 6 trading days into
their 4,060.75 February 10 low.
The futures now appear to be using the 61.8% Fibonacci
retracement of the August-October leg down at 4,055.57 as
support.
In overnight action into Monday, the futures dipped as low
as 4,078.75 before snapping back. They are now up slightly
around 4,105.
Thus, traders are watching for a breakout of essentially,
the 4,055-4,209 area to potentially signal in which direction
the futures will next ratchet up or down.
The August 16 high was at 4,377.50.
The January 31 low was at 4,007.50, and the 50 and 200-DMAs
are now down in the 3,991-3,886 area.
That said, the futures are still making higher-highs and
higher-lows off their mid-December/early-January troughs,
suggesting a still intact uptrend.
(Terence Gabriel)
*****
FOR MONDAY'S LIVE MARKETS' POSTS PRIOR TO 0900 EST/1400 GMT
- CLICK HERE
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
EScv102132023 Early trade Feb 13 Inflation CPI and wage growth ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
(Terence Gabriel is a Reuters market analyst. The views
expressed are his own)
