- Three major U.S. indexes lower; Dow down more than 1%
- Real estate is biggest S&P sector loser, energy up most
- STOXX closes down 1%
- Crude, dollar, Bitcoin up; gold down
- U.S. 10-yr Treasury yield ~1.77%
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MARCH IS STILL A LONG WAY AWAY FOR FED (1330 EST/1830 GMT)
General market consensus is that the Federal Reserve will begin its tightening cycle as soon as March, with a strong possibility of four hikes on deck in 2022.
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But two months is a very long time, why Lee Ferridge, head of macro strategy for North America at State Street Global Markets, thinks the market could be getting ahead of itself.
“There are a lot of moving parts before we get (to March), to be so confident of a move in March two months ahead is a little overpriced,” Ferridge told Reuters on Thursday.
He chalks this up to uncertainty around how much the Omicron-led jump in coronavirus cases dampens economic activity, as well as data showing the labor market has not completely recovered from the Covid-19 hit.
U.S. jobless claims recently increased more than expected, and Ferridge points to a decline in real average hourly earnings on a yearly basis as further evidence of a shaky labor market, which could indicate there’s still a way to go to reach maximum employment. read more
“Because we are fully priced for March and have about four hikes priced in for 2022, the obvious risk is that we take out some of that pricing.”
PGIM also sees the pace of the Fed’s expected hikes falling short of market pricing, although they anticipate the first rate increase in March or May.
“The Fed may ultimately find it prudent to slow down its pace of tightening later this year, particularly if it is also launching an early start to quantitative tightening,” PGIM economist Ellen Gaske wrote in a Thursday note.
The best way to play this “overconfident” trade is through the dollar, especially if the Fed does slows the pace of rate hikes when it launches quantitative tightening, according to Ferridge.
“A lot of people started the year overweight the dollar based on the normalization of policy and it’s not reacting in the right way, there could be more to go,” he says.
BULLISH SENTIMENT SLIDES TO FOUR-MONTH LOW: AAII SURVEY (1330 EST/1830 GMT)
Bullish sentiment has sunk to a four-month low while the number of investors who describe their outlook for stocks as “bearish” and “neutral” has increased, the latest survey from the American Association of Individual Investors shows.
Optimism was last lower on Sept. 16 as expectations stock prices will rise the next six months slid 7.9 percentage points to 24.9%, the AAII Sentiment Survey taken in the seven-day period ending Wednesday showed.
Bullish sentiment is below its historical average of 38.0% for the eighth straight week while expectations stock prices will fall the next six months increased by 5.0 percentage points to 38.3%, above a 30.5% historical average for bearishness.
Expectations that stock prices will stay essentially unchanged over the next six months increased by 2.9 percentage points to 36.8%, the sixth consecutive week that neutral sentiment is above its 31.5% historical average.
The coronavirus, including the uneven return to normalcy, monetary and fiscal stimulus and inflation are the big concerns regarding the outlook for stocks. Other factors include earnings, valuations and the Biden administration’s initiatives.
WALL ST FALLS, LED BY 1% DOW DROP (1250 EST/1750 GMT)
Major U.S. stock indexes are lower in afternoon trading Friday, led by a more than 1% decline in the Dow (.DJI), while Wall Street’s fear gauge, the Cboe Volatility index (.VIX) edged higher.
JPMorgan Chase (JPM.N) is the biggest drag on the S&P 500 (.SPX). The bank’s stock is down more than 6% after it reported a weaker performance at its trading arm, though the company beat earnings expectations for the fourth quarter.
Mixed results from other big banks gave a disappointing start to the fourth-quarter U.S. earnings season. The S&P 500 bank index (.SPXBK), which has been hitting fresh record highs, is down 2.3% on the day.
Here is the early afternoon U.S. market snapshot:
EUROPE WEEK 2: 15% GAP BETWEEN TECH AND BANKS (1150 EST/1650 GMT)
The session ends with a second straight week of losses for European stocks and a 1.4% dip since the beginning of the year.
While the performance of the pan-European STOXX (.STOXX) isn’t that spectacular, the gap between winners and losers truly is.
Early 2022 is a brutal illustration of how an early inflation/monetary tightening cycle can unfold for stocks.
Consider this: European banks are up 10% so far in 2022 while tech stocks are down 5.8%: that’s a gap of over 15% in 2 weeks.
While many central banks are expecting – and hoping – that inflation will peak later this year, the sectors which are typically boosted by rising prices are thriving.
In these early days of 2022, oil & gas is up 9.2%, miners gained 7.6% and insurers rose 5.9%.
Autos are also up a handsome 8% as the hype surrounding EVs is very much a thing for European investors.
It’s quite a different story of course for defensive sectors such as healthcare, which already is down close to 6%.
Here are how the sectors of the STOXX 600 fared today and so far this year:
BANKING ON IT: VALUE STOCKS TOP PICK FOR THE LONG TERM (1130 EST/1630 GMT)
With inflation readings at multi-decade peaks, bank stocks – which perform well in inflationary periods – are high on investors’ lists as they are expected to benefit from rising lending margins due to higher yields.
Dave Harden, chief investment officer of Summit Global Investments, picks value stocks over growth in the long-term and predicts a “tremendous year” for U.S. banking stocks in 2022 – despite the tumble they took on Friday.
The S&P 500 banking sector (.SPXBK) gained 9.4% last week as Treasury yields rallied on rate hike expectations compared to a 1.9% fall in the benchmark index (.SPX). Harden expects at least three Federal Reserve hikes with above a 60% chance of a fourth.
Retail investors have also boosted their exposure to lenders’ stocks ahead of the earnings announcements, according to Vanda Research’s weekly report on retail flows.
Financials were among the most sought after equity sectors relative to recent history, with small-time investors picking up $289 million over the past week versus an average of $190 million over the past two years, the report said earlier in the week.
Summit’s Harden told the Reuters Global Markets Forum on Thursday he sees JPMorgan (JPM.N) and Bank of America (BAC.N) continuing to outperform in 2022. Outside banking, he says Facebook owner Meta Platforms (FB.O) is a contrarian position he holds.
“People seem to be haters here. Meta Platforms is very cheap — bottom quartile — compared to other large Tech names. But their growth is above average and their margins are top quartile….I know this is not popular but it’s time.”
(Sanjana Shivdas, Aaron Saldanha)
RELEASE THE HOUNDS – ER, DATA: A FRIDAY ECON WRAP-UP (1100 EST/ 1600 GMT)
A torrent of data was released on market participants like a pack of dobermans on Friday, chock full on mostly unpleasant surprises which provided fresh reminders that U.S. consumers and the economy are still being dogged by Omicron, hot inflation and a tangled supply chain.
Receipts and U.S. retailers (USRSL=ECI) unexpectedly dropped by 1.9% last month, according to the Commerce Department. read more Analysts expected a flat reading.
Line-by-line, the decline was broad based, with non-store retailers (which includes online and catalog), and department stores suffering the biggest declines, tumbling by 8.7% and 7.0%, respectively.
The causes of this unpleasant surprise are largely inter-related. Spiking COVID cases kept shoppers at home, wile pandemic-related supply issues kept goods scarce and prices high.
“December was a rough month for the American consumer,” writes Anu Gaggar, global investment strategists at Commonwealth Financial Network. “Between higher prices, empty shelves, consumers sick from omicron, and holiday shopping pulled forward, retail activity declined even more than expected, and November numbers were also revised lower.”
Additionally, many consumers – in reaction to those supply challenges – seem to have started their holiday shopping earlier than usual, benefiting the October number at December’s expense.
Core retail sales, which strips out autos, gasoline, building materials and food services, and is the closest proxy for the personal consumption component of GDP, posted an even bigger unexpected drop, plunging by 3.1%.
That is particularly dour news, considering the fact that the consumer shoulders about 70% of U.S. economic growth.
Speaking of the consumer, attitudes have been following mercury levels lower this month.
The University of Michigan’s preliminary take on January Consumer Sentiment (USUMSP=ECI) delivered a print of 68.8, below the even 70 consensus.
Attitudes regarding the current situation edged lower, but pessimism regarding near term expectations did the most damage.
Inflation weighed heaviest on consumers’ minds in the opening weeks of 2022, with near- and long-term inflation expectations heating up to 4.9% and 3.1%, respectively.
“While the Delta and Omicron variants certainly contributed to this downward shift, the decline was also due to an escalating inflation rate,” writes Richard Curtin, chief economist with UMich’s Surveys of Consumers. “Three-quarters of consumers in early January ranked inflation … as the more serious problem facing the nation.”
Which provides a tidy segue.
The prices Americans pay for imported goods (USIMP=ECI) also defied consensus by inching 0.2% lower in December according to the Labor Department. read more
The falling cost of petroleum prices was largely responsible for the decline, adding another voice to the growing chorus that the stubbornly persistent inflation wave, which has moved the Federal Reserve to shorten its timeline for tightening its COVID-era monetary policy, is at or past its peak.
Year-on-year, import price growth cooled down, shedding 1.3 percentage points to a still-blistering 10.4%.
However, Mahir Rasheed, U.S. economist at Oxford Economics, also expects “import prices should begin to unwind in Q2 with energy prices moderating and domestic demand cooling as the Fed pivots to tightening monetary policy.”
Despite the December decline, the series remains hotter that other major indicators, all of which continue to cruise at an altitude far above the Fed’s average annual 2% inflation target.
Another unwelcome surprise arrived courtesy of the Federal reserve’s industrial production (USIP=ECI) report, which showed output unexpectedly slipped by 0.1% in the last month of 2021.
Manufacturers disappointed even more, with factory output dropping 0.3% in defiance of the 0.5% growth economists projected.
“We expected a soft headline, because wamer-than-usual weather reduced demand for heating energy, and natural gas extraction plunged by 7.9%,” says Ian Shepherdson, chief economist at Pantheon Macroeconomics. “But the softness in manufacturing is disappointing, and it can’t all be blamed on the ongoing supply problems in the auto sector, where production fell 1.3%.”
Capacity utilization (USCAPU=ECI) also zagged where it was expected to zig, inching nominally lower to 76.5% instead of rising to 77%.
Even so, capacity use, a measure of economic slack, remains slightly above where it was just before a global health crisis threw a monkey wrench into the works.
Taken together the Fed’s report is a stark reminder of the sorry state of the global supply chain, which continues to limp along under the weight of booming demand, scarcity of materials and lack of workers.
Lastly, in more ancient news, the value of goods in the store rooms of U.S. businesses (USBINV=ECI) increased by 1.3% in November, bucking the trend by hitting the expectations bulls eye.
The Commerce Department data bodes well for fourth quarter economic growth, hinting that private inventories’ contribution could stay out of the negative column, where it sat in the first half of 2021.
The data wolves, along with a mixed set of big bank earnings from JPMorgan Chase (JPM.N), Citigroup (C.N), and Wells Fargo put investors in a selling mood in morning trading. read more
All three major U.S. stock indexes were red, with cyclicals and economically sensitive transports (.DJT) down the most.
BANK STOCKS STUMBLE AS Q4 EARNINGS GATE OPENS (1005 EST/ 1505 GMT)
Some of the biggest U.S. banks kicked off earnings season on Friday with a sickening thud for investors with JPMorgan (JPM.N) tumbling 4.8% and Citigroup (C.N) down 2.4% after their reports. Only Wells Fargo shares were in demand with a 1.4% gain.
The S&P 500 bank index (.SPXBK) was last trading down 2.0% on the day after hitting an intraday record high in the previous day’s session. It ended up Thursday 10.4% so far for 2022 after rising 32.3% in 2021.
While JPMorgan – the largest U.S. bank that is a barometer of the economy’s health – beat Wall Street’s expectations even as it reported a 14% profit decline due to a slowdown in trading which offset a stellar performance in investment banking.
Trading revenue fell 13% while investment banking revenue surged 28% thanks to a bumper deal year. read more
UBS analyst Erika Najarian wrote in a note ahead of the conference call that JPM’s slides show its outlook for $77 billion in expenses is 6% above consensus.
“This does not fit the “beat and raise” narrative investors have for banks in 2022,” she said.
Citigroup reported a 26% slump in fourth-quarter profit on Friday as it took a hit from higher expenses and weakness at its consumer banking unit. read more
However, Wells Fargo beat analyst profit estimates in the quarter as a rebound in U.S. economic growth encouraged more customers to take loans and the bank kept a tight lid on costs. read more
Still, the news made investors anxious about other big banks due to report results next week with Morgan Stanley (MS.N) falling 2.6% and Goldman Sachs (GS.N) off 2.4%.
WALL STREET POISED TO REMAIN RISK-OFF (0915 EST/1415 GMT)
Stock futures on Wall Street traded lower on Friday after U.S. retail sales dropped in December instead of staying flat and banking results at the start of earnings seasons failed to provide a reason for budging the risk-off sentiment.
Retail sales fell 1.9% after rising 0.2% in November, the Commerce Department said, while economists polled by Reuters had forecast retail sales unchanged.
Shares of JPMorgan Chase & Co (JPM.N) slid after it posted a 14% decline in fourth-quartre earnings due to a slowdown in the company’s trading arm. But results sailed past analysts’ estimates on stellar results from its investment banking unit. read more
Citigroup (C.N) also slid after the the bank reported a 26% drop in quarterly profit. But the company exceeded market expectations as strong gains in its investment banking business cushioned the blow from higher expenses. read more
But shares of Wells Fargo & Co gained in pre-market trade after posting a greater-than-expected rise in fourth-quarter profit. read more
Futures for the Dow Industrials , S&P 500 and the Nasdaq were all down about 0.8% prior to the opening bell.
Here’s a snapshot the market:
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