Stocks Trim Gains Ahead of Powell Speech

Hawkish Fed Muddies Markets

European stock markets trimmed some of their 2023 gains in early trade on Tuesday ahead of a speech by Fed chair Jay Powell, and in the wake of some fairly (though not extremely) hawkish comments from other Fed officials that left Wall Street with a mixed performance to start the week. The FTSE 100 had added another third of a percent on Monday to close at 7,725, with the lifetime high at 7,903 from May 2018 not a million miles away. This morning it’s given up about a third of a percent to dip back below 7,700 with some easing in the China reopening stocks gains even as copper raced past $4 to its highest since June, with retail also hit a bit. Frankfurt is down a similar amount at around 14,750, while Paris shed two-thirds of a percent. Conviction though remains pretty hard to find ahead of the key US CPI inflation report on Thursday.

Big Movers; Dollar Stumbles

Yesterday it was broadly a case of the dollar on the back foot, stocks generally finding bid...some big movers in COIN and TSLA highlighting the re-emergence of a kind of oversold bargain buying … still has the hallmarks of a bear market rally. The S&P 500 rallied at first but gave up gains to finish mildly lower, whilst the Dow Jones rose more than 300pts before finishing down by almost 113pts. The Nasdaq composite closed the day up 0.6% with bargain hunting investors driving TSLA up 6% and ARKK by 5%, whilst semis (NVDA and AMD) rallied 5% as Wells Fargo named them a top pick for 2023. Covid vaccine maker CureVac jumped 25% as Jeffs upgraded to buy and is now up 70% in the last week after making progress on its combined flu and covid vaccine.

Extent of Rate Hikes Unclear

Destination anywhere: Atlanta Fed president Raphael Bostic said rates should go to 5% by early in the second quarter and then remain there for "a long time". San Francisco Fed president Mary Daly said the "case can be made for either" a 25bp or 50bp hike next time, rates need to go above 5% but how far is "not completely clear". The current Fed funds rate is between 4.25% and 4.5%. Minutes from the last meeting show most FOMC members think it reach 5-5.25% and don’t foresee cutting this year. Whilst the Fed seems to be signalling it will continue to slow the pace of hikes, it’s the old Waller comment that we go back to: “Quit paying attention to the pace and start paying attention to where the endpoint is going to be.” Right now, we don’t know where the endpoint is, but markets are behaving like it’s close. The 3-month yield rose to the highest since 2007 above 4.6%, whilst the 2yr is down around 4.2% – markets don’t think the Fed is shying away from rate hikes, but they still think it will be done soon and will start cutting later in the year. This is a mistake.

Unsurprisingly, More Inflation News

The labour market holds the key and we’re not seeing much in the way of slack. Bank of England chief economist Huw Pill yesterday warned that the UK was at risk of more persistent inflation even as energy costs come down due to the tightness in the labour market... This is what we’ve been talking about with regards the US for a while, but it’s absolutely also the case for the UK and Europe. EZ employment data out yesterday indicates room for more rate hikes, with unemployment dropping to a record low. November unemployment fell to 10.8mn, with the unemployment rate at 6.5 percent, the lowest since records started in 1995.

Stocks to Watch

COIN – Coinbase popped 15% as Jefferies said it could benefit from FTX demise. They write that it remains the “de facto on-ramp into crypto” thanks to its “premium brand, position as an onshore/regulated entity, scale, and healthy balance sheet should enable it to weather the industrywide fallout from FTX’s collapse”. Bitcoin continued to make steady incremental gains to rise above $17k again.

LULU – Lululemon fell about 9% after weaker margin guidance – Morgan Stanley’s Mike Wilson notes that peak inflation is good for bonds but not so good for profits. Macy’s (M) also warned on softer holiday sales.

Games Workshop (GAW) - Shares fell 5% with the half-year report containing no further details on the Amazon tie-up. “We have nothing more to say at this stage. We will keep you informed. We remain confident we will bring the worlds of Warhammer to the screen like you have never seen before.” Investors were keen to hear a bit more and the tone is one of ‘please stop asking’.

In the Charts Today

In FX, the pound is a tad lighter this morning vs the dollar after two strong days of gains. The euro trades a little firmer. Here we see USD (DXY) breaking down at key support area + death cross signal.

Copper – three white soldiers and bullish MACD crossover – all China reopening narrative as crude prices point to worries that Fed hikes will hit demand.