Stocks extend rebound bid following Fed Chair Powell's confirmation hearing - Long-term interest rates decline

• GLOBAL CAPITAL MARKETS OVERVIEW:

The Dow fell for a fifth straight session, dropping about 200 points on Tuesday, the S&P 500 fell for a sixth straight day, its longest losing streak since February 2020, while the Nasdaq edged higher and lower, fluctuating between. Investors focused on the Fed chair's Senate confirmation hearing, which reinforced the case for tighter monetary policy. Meanwhile, tomorrow's U.S. inflation report will likely show inflationary pressures lingering into the end of the year. On the corporate front, Intel Corp rose 0.4% after it named Micron Technology CFO David Zinsner as its new CFO, while UBS downgraded it to "neutral" from "neutral." IBM shares fell 4% after the sell-off. The S&P/TSX Composite hovered around 21,070 on Tuesday, with losses in the tech and healthcare sectors offsetting gains in the energy sector. At the same time, investors awaited the release of U.S. consumer price data tomorrow. U.S. inflation is expected to rise 7% in December from a year earlier to the highest level in 40 years, further evidence of the need to accelerate monetary policy tightening. Healthcare shares fell 1.2%, led by Tilray (-4.9%), as the cannabis producer pared some of yesterday's 10% gain after announcing higher profits due to cost-cutting. Bausch Health (-1%) also posted losses. Tech stocks fell 0.8%, led by Shopify (-2.3%). The e-commerce giant extended its 7.3% decline this year, in line with other tech stocks, as the Federal Reserve is expected to raise interest rates in March. On Tuesday, European shares rose more than 0.5%, recovering from a three-session losing streak, as investors shrugged off inflation worries and Omicron. U.S. inflation is projected to see the biggest rise in consumer prices in nearly 40 years and could prompt the Federal Reserve to raise interest rates in March for the first time since the pre-pandemic era. On Friday, eurozone inflation hit a record high of 5% in December. Meanwhile, the ECB's Philip Lane said inflation expectations will fall this year and stay below their 2% target in 2023 and 2024. In terms of economic data, UK retail sales rose 2.1% year-on-year in December 2020 and 9.9% compared to 2019, according to the UK Retail Consortium and KPMG. In addition, the latest data from Barclaycard showed that consumer spending rose 12.2% last month from two years ago. The FTSE MIB index rose 1 percent to close near 27,630 on Tuesday, partially recovering from a three-session losing streak, supported by a rebound in the tech sector. Tech stocks rose 3.2% in the session, having fallen more than 5% since the start of the year on expectations the Federal Reserve will raise interest rates and the European Central Bank will reduce stimulus, led by Nexi (3.3%) and STMicroelectronics (2.8%). The luxury sector also recorded gains, led by Brunello Cuccinelli (7%) and Montclair (2%). Meanwhile, Italian lender Carige tumbled 11.2% after the Interbank Deposit Protection Fund announced that Bper Banca (2.2%) had obtained the exclusive right to discuss a takeover with Carige, excluding Credit Agricole Italia from the shortlist. .On Tuesday, the CAC 40 rose 1.3% to hover around 7,210, recovering from a three-session losing streak as technology and luxury sectors rebounded. Technology stocks rose 2.3% after nine straight sessions of losses on expectations the Federal Reserve will tighten monetary policy, led by Capgemini (2.8%) and STMicroelectronics (2.4%). Meanwhile, LVMH rose 1.7% after RBC raised its target price to 820 euros from 785 euros, and Kering rose 3.2%. On the pandemic front, the number of people hospitalized with the coronavirus rose by 767 in the past 24 hours, the largest increase since April. Labour productivity output per hour in the UK fell by 1.4% in the three months to September 2021, the first decline from October to December 2020. Still, output per hour worked was 1.1% above pre-coronavirus levels, as GVA and hours worked were 1.4% and 2.4% below those levels, respectively. Meanwhile, output per capita continued to recover, rising 0.3% quarter-on-quarter but still 0.6% below pre-coronavirus levels. The removal of furlough schemes has greatly contributed to the convergence of output per hour and output per worker estimates, which have had different effects on the two measures. The Shanghai Composite Index fell 0.73% to close at 3,567 points. In comparison, the tech-heavy Shenzhen stock market fell 1.27% to close at 14,223 points on Tuesday, after a previous market rebound failed to gain momentum, with consumer-related and technology stocks leading the decline. Chinese stocks have had a weak start to the year, prompting securities regulators to pledge measures to stabilize the market to ease investor jitters. At the same time, investors are also closely monitoring the development of the new crown epidemic in China, as Beijing is on high alert after the first outbreak of the omicron mutation in a nearby city. Notable decliners included BYD Corporation (down 2.95%), Longi Green Technology (down 2.11%), Nora Technology (down 4.1%), Luxor Precision (down 3.77%), Midea Group (down 2.83%), and Great Wall Motor (down 5.95%). The Nikkei 225 fell 0.9 percent to end at 28,222 on Tuesday. In comparison, the broader Topix lost 0.44 percent to end at 1,987 as investors remained cautious ahead of key U.S. inflation data and extended border controls also weighed on the economy. The market creates pressure. Investors are bracing for renewed interest in U.S. inflation, which could support more aggressive tightening by the Federal Reserve. Equities came under pressure as global bond yields rose steadily, with 10-year JGB yields hovering at March 2021 highs. Meanwhile, Japanese Prime Minister Fumio Kishida said that the government will further extend the entry ban on non-resident foreigners until the end of February. Japanese electronics makers and chip makers led the declines, with Leicester (down 4.62%), Kean (down 7.89%), Tokyo Electron (down 3.34%), Mitsui High-Tech (down 7.87%), and Renesas Electronics (down 7.87%) 2.05%) led the decline. The NZX 50 fell 0.47% to close at 12,832 on Tuesday, its fourth straight session of losses, as Rising bond yields pressured new Zealand shares. New Zealand's benchmark 10-year bond yield jumped to 2.54% this week, tracking a steady rise in U.S. Treasury yields as traders braced for more aggressive monetary tightening by the Federal Reserve. Almost all market sectors fell, with Serko (-4.46%), Vista (-3.54%), Contact Energy (-2.85%), Argosy Property (-2.83%) and Kathmandu (-2.74%) notable decliners. Meanwhile, stocks able to withstand the sell-off included New Zealand Restaurant Brands (2.46%), Ebbers (1.48%), Fonterra Shareholders (1.37%), Travel Holdings (1.36%), and Auckland Airport (1.18%).

 

• REVIEWING ECONOMIC DATA:

Looking at the last economic data:

- US: The U.S. IBD/TIPP Economic Optimism Index fell sharply from 48.4 in December to 44.7 in January 2022, a sign that Americans are becoming more pessimistic as omicron case levels explode and inflation continues hit new generation highs. The six-month U.S. economic outlook index slipped 4.9 points to 37.9, the lowest level since July 2020. The significant shift comes as investors suddenly feel more pessimistic about the U.S. economic outlook than they have been in more than five years. In addition, the Federal Economic Policy Support Index fell 3.6 points to 43.9. Finally, the personal finance sub-index fell 2.6 points to 52.3, well below its peak but still reflecting moderate optimism.

- US: Fed Chairman Jerome Powell sees inflationary pressures lingering into mid-2022 and expects the Fed to raise interest rates and end asset purchases this year. At the same time, balance sheet contraction could begin later in 2022. During the Senate confirmation hearing, Powell also noted that the Fed could raise interest rates further if needed to bring inflation back to target and prevent it from becoming entrenched. At its December 2021 meeting, the Fed announced that it would end its pandemic-era bond purchases in March, paving the way for three rate hikes in late 2022. But the minutes of the Federal Open Market Committee meeting released later showed that the Fed was more hawkish. The Fed suggested that the Fed may have reason to raise the federal funds rate earlier or faster than previously expected.

- US: U.S. consumer inflation expectations remained at a record 6% in December, unchanged from November for 2021. Home price expectations rose to 5.5% from 5% in November but are still below their May 2021 peak. In addition, uncertainty and disagreement about future inflation decreased, and expectations for price changes in the coming year fell by 3.5 percentage points, with gasoline prices down 5.7 percent, food prices down 1.4 percentage points, and college education costs down 1.0 percentage points (down 8.1%). Meanwhile, households reported being more optimistic about the labor market outlook, with improved income growth, unemployment, and employment expectations. As a result, families' income growth expectations also improved, reaching a new series high. Meanwhile, medium-term three-year inflation expectations are also steady at 4%.

- US: The U.S. NFIB Small Business Optimism Index rose to a 3-month high in December 2021 from 98.4 in November, beating consensus forecasts of 98.6. The stock rose on the back of more companies planning to increase employment and capital spending, boost earnings, and a slight pick-up in expectations for business conditions over the next six months. In addition, the percentage of owners raising their average selling price fell two points to 57%, with 49% saying they couldn't fill vacancies, up to one point from November.

- SW: Swedish household consumption increased by 1% in November 2021 compared to the previous month, at the same pace as the previous month, with pressure from clothing and footwear consumption (8.7% vs. 4.7% in October), food and beverages (1.6%) % to 0.7%), furniture, furnishings. Household equipment and consumables (4.6% to -3.1%), post and telecommunications (3.5% to -4.3%), entertainment and culture, goods and services (1.4% to 0.3%), housing and utilities (0.6% to -0.4%) ) and other goods and services (6.4% vs. 2.2%).

- SW: Swedish household consumption increased by 1% in November 2021 compared to the previous month, at the same pace as the previous month, with pressure from clothing and footwear consumption (8.7% vs. 4.7% in October), food and beverages (1.6%) % to 0.7%), furniture, furnishings. Household equipment and consumables (4.6% to -3.1%), post and telecommunications (3.5% to -4.3%), entertainment and culture, goods and services (1.4% to 0.3%), housing and utilities (0.6% to -0.4%) ) and other goods and services (6.4% vs. 2.2%).

- EU: Italian retail sales fell 0.4% in November 2021, the first decline since July, compared with a 0.2% increase the previous month and market expectations for a 0.6% increase. The numbers have risen. Sales of food products fell (-0.9% compared to flat in October), and sales of non-food products remained unchanged (up 0.5% compared to flat in October). On an annual basis, retail sales rose 12.5%, the highest since May, and up from an upwardly revised 4% in the previous month.

- JP: Japan's economic indicators, including factory output, employment, and retail sales, jumped to 93.6 in November 2021 from 89.8 last month, flash data showed. It was the highest level since July and rose for the second straight month as coronavirus-related disruptions eased as infection rates fell and vaccinations accelerated.

- JP: An index of Japan's leading economic indicators, a gauge of the economy in the coming months and compiled using data such as employment opportunities and consumer confidence, rose to 103 in November 2021, after the last reading of 101.5 a month earlier. This is because the preliminary tasks are displayed. Since July, it was the highest level when vaccinations surged and supply chain disruptions eased.

- UK: UK retail sales rose 0.6% year-on-year in December 2021, slowing from a 1.8% increase the previous month, with spending reduced in the final weeks of the year as the popularity of OmiCon and updated government guidelines minimize spending. Sales of clothing and jewelry continued to dominate Christmas gift purchases. At the same time, spending on food and drink firmed despite concerns over the impact of omicron, the UK Retail Consortium's report showed. The report also noted that many people chose to shop online in December rather than near nearby high streets and malls. However, the report warned that in 2022 the industry would face significant headwinds from high inflation, rising energy bills, and planned tax increases. Every year, retail sales in 2021 increased by 8.9% year over year.

- AU: In November 2021, Australia's trade surplus was cut by 10.78 billion Australian dollars from the previous month's AUD, below market expectations of 10.6 billion Australian dollars, to 9.42 billion Australian dollars. Since April, it was the smallest trade surplus with global demand softening as more countries battle a resurgence of coronavirus infections. Exports rose 2% month-on-month to A$43.86 billion, while imports rose 6% month-on-month to a 23-month high of A$34.44 billion. Considering the first 11 months of the year, the trade surplus surged to A$114.80 billion from A$65.22 billion in the same period in 2020.

- AU: Australia's domestic imports of goods and services rose 6 percent to a 23-month high of A$34.44 billion in November 2021 as Christmas and year-end holidays approached, as stringent restrictions in several key countries Confinement measures eased as vaccinations accelerated. Arrivals of intermediate and other goods rose 7 percent to $12.98 billion, driven by primary industrial supplies (148 percent) and processed industrial supplies (7 percent). In addition, imports of capital goods surged 7 percent to A$7.09 billion, with higher imports of civil aircraft and classified items (46 percent) and industrial transport equipment (19 percent); consumer goods rose 3 percent to A$8.96 billion, household appliances (20 percent) ) and non-consumer goods (3%) led gains. In addition, service arrivals increased by 2 percent to $4.82 billion, mainly due to travel (4 percent) and other services (1 percent).

- SK: South Korea's current account surplus shrank to $7.16 billion in November 2021 from an excess of $9.18 billion a year earlier due to higher energy and raw material prices and higher imports. The index posted a surplus for the 19th straight month. Imports rose $16.74 billion to $53.7 billion in November, driven by a 72.9% year-on-year rise in raw material prices, with crude oil prices up 127.8%. Merchandise balances fell to $5.95 billion in November from $9.95 billion the previous year. Exports totaled $59.65 billion, compared with $46.92 billion in the same period last year. Meanwhile, the service account posted a deficit of $140 million in November, compared with $980 million a year earlier.

 

• LOOKING AHEAD:

Today, investors will receive:

- USD: CPI m/m, Core CPI m/m, FOMC Member Brainard Speaks, Crude Oil Inventories, 10-y Bond Auction, Beige Book, and Federal Budget Balance.

- EUR: German WPI m/m, Industrial Production m/m, and German 30-y Bond Auction.

- GBP: MPC Member Cunliffe Speaks, and NIESR GDP Estimate.

- JPY: Bank Lending y/y, and Current Account.

- CNY: CPI y/y, PPI y/y, M2 Money Supply, and New Loans.

- NZD: ANZ Commodity Prices m/m, and Building Consents m/m.

 

• KEY EQUITY & BOND MARKET DRIVERS:

- U.S. stocks were lower on Tuesday, and U.S. Treasury yields continued to rise as investors awaited Fed Chairman Powell's Senate confirmation hearing for an update on the central bank's policy to curb high inflation. However, his prepared remarks gave no further details on the central bank's plans clue. Moreover, tomorrow's U.S. inflation report is likely to show inflationary pressures will persist through the end of the year, reinforcing the case for faster monetary policy tightening. The Dow fell nearly 100 points, while the S&P 500 and Nasdaq lost about 0.3%. On the corporate front, Intel Corp rose 0.8% after it named Micron Technology CFO David Zinsner as its new CFO, while UBS downgraded it to "neutral" from "neutral." IBM shares fell 4% after the sell-off.

- U.S. futures prices rose on Tuesday, with the Dow up more than 100 points, the S&P and Nasdaq up around 0.5% each, as a rebound in tech stocks led to steady bond yields. Meanwhile, traders awaited Fed Chairman Powell's Senate confirmation hearing to update the central bank's policy to curb high inflation. Investors are also awaiting an inflation report due tomorrow that could show inflationary pressures lingering through the end of the year and reinforce the case for quicker monetary policy tightening. On Monday, the Dow fell 163 points to end at 36,069, the S&P 500 lost 0.1% to end at 4,670, and the Nasdaq was little changed at 14,943.

- French 10-year government bond Yeld rises to a 10-week high of 0.307%.

- German 10-year government bond Yeld rises to 32-month high -0.023%.

- Russia's 10-year government bond Yeld rises to a 3-year high of 8.67%.

- German 10-year bond yields hovered around -0.04% in the second week of January, the highest level since May 2019, on expectations of an accelerated rate hike schedule and a surge in inflation. The latest data showed that inflation in the eurozone hit a record high of 5% in December. As a result, money markets are now betting on a rate hike of around 15 basis points by December 2022, with bank guidance suggesting no rate hikes this year. Elsewhere, the Fed is expected to raise interest rates as early as March due to persistently high inflation and an improving labor market outlook.

- European stock futures opened on a positive note on Tuesday, attempting to rebound from the previous session as investors shrugged off inflation fears and the omega. U.S. inflation is projected to see the most significant rise in consumer prices in nearly 40 years and could prompt the Federal Reserve to raise interest rates in March for the first time since the pre-pandemic era. On Friday, eurozone inflation hit a record high of 5% in December. Meanwhile, the ECB's Philip Lane said inflation expectations will fall this year and stay below their 2% target in 2023 and 2024. In terms of economic data, UK retail sales rose 2.1% year-on-year in December 2020 and 9.9% compared to 2019, according to the UK Retail Consortium and KPMG. In addition, the latest data from Barclaycard showed that consumer spending rose 11.1% last month from two years ago.

- The 10-year OFZ yield rose to 8.6% in the second week of January, not far from a three-year high of 8.66% hit on Nov. 23, when geopolitical tensions intensified, and U.S. policy was expected to tighten. Military tensions on Russia's border with Ukraine have led U.S. President Joe Biden to say the U.S. will "respond decisively" if Russia invades Ukraine further. Meanwhile, the Fed could raise the federal funds rate as early as March. Meanwhile, the Bank of Russia raised its key interest rate by 100 basis points to 8.5% at its final meeting on Dec. 17, but expectations that policy rates may be near their peak and ease in 2022 should increase Russian debt instruments foreign demand. The central bank estimated inflation at 8.1% in mid-December but is expected to fall to 4%-4.5% by the end of 2022.

 

• STOCK MARKET SECTORS:

- High: Energy, Information Technology, Consumer Discretionary.

- Low: Real Estate, Consumer Staples, Utilities.

 

• TOP CURRENCY & COMMODITIES MARKET DRIVERS:

- CNY: The offshore yuan rose around 6.377 yuan per dollar on Tuesday, boosted by strong corporate demand. At the same time, expectations of more aggressive monetary tightening by the Federal Reserve continued to cap gains. Corporate demand for the yuan ahead of the long Lunar New Year holiday usually provides seasonal support for the yuan. However, the yuan remained under pressure as the Fed's hawkish solid signal pushed up U.S. Treasury yields, squeezed the 10-year yield spread between China and the U.S., increasing the risk of capital outflows. In addition, Chinese policymakers are increasingly focused on stabilizing a slowing economy, and they are widely expected to maintain their accommodative leanings. Moreover, the recent outbreak of the coronavirus in the country and the resulting lockdown have also strengthened the case for further easing.

- JPY: On Tuesday, the yen hovered around 115.2 yen/dollar, holding on to the previous session's gains as it benefited from over-the-counter risks triggered by the Federal Reserve. The yen surged against the yen, with the benchmark 10-year JGB yield hovering above its March 2021 high of 0.14%. The yen, however, remained near five-year lows as monetary policy in Japan and elsewhere continued to diverge. The Bank of Japan is widely expected to maintain its ultra-easy policy as inflation remains well below the central bank's 2 percent target, even as other central banks say they are ready to normalize monetary conditions. Meanwhile, Japan's finance minister recently highlighted the need for currency stability and said he closely monitored market movements and their impact on the economy.

- AUD: The Australian dollar jumped to $0.72 on Tuesday, buoyed by strong retail sales data that easily topped expectations as consumers went on a spending spree in November. However, the yuan remained under pressure on expectations of more aggressive monetary tightening by the Federal Reserve. U.S. policymakers considered faster rate hikes and discussed quantitative tightening this year to curb persistently high inflation, minutes from the Fed's latest meeting showed. The hawkish stance pushed up U.S. bond yields, hurting stocks and risk-sensitive currencies. At the same time, the Reserve Bank of Australia has repeatedly insisted that domestic interest rates are not likely to rise until 2023 or until inflation continues to push above its 2-3% target range. In addition, the RBA has lagged other major central banks in withdrawing its pandemic-era stimulus but will decide at its February 1 meeting whether to end bond purchases at the start of the year.

- NZD: The New Zealand dollar hovered below $0.679 on Tuesday, struggling to gain momentum as traders braced for more aggressive monetary tightening by the Federal Reserve against the backdrop of a steady rise in U.S. Treasury yields. U.S. policymakers considered faster rate hikes and discussed quantitative tightening this year to curb persistently high inflation, minutes from the Fed's latest meeting showed. The hawkish stance pushed up U.S. bond yields, hurting stocks and risk-sensitive currencies. Meanwhile, the Reserve Bank of New Zealand has raised rates twice this year to 0.75% and is widely expected to grow rates to 1.0% at its Feb. 23 policy meeting amid persistent inflation and record-low unemployment. In addition, new Zealand's economy contracted more modestly than expected in the third quarter, also cementing expectations for further monetary policy tightening by the central bank, but currency moves remained dovish.

- CAD: The Canadian dollar fell to above 1.265 from a one-week high of 1.2643 hit on Jan. 7, as investor sentiment was hit by the prospect of higher U.S. interest rates, while lower oil prices weighed on the Canadian dollar. In the U.S., where traders are betting on higher rates, the odds are rising that the Fed will raise the federal funds rate four times this year, rather than the three times the central bank hinted earlier. Meanwhile, investors are awaiting U.S. consumer price data on Jan. 12 for signs of a Fed rate hike. Inflation in the U.S. is expected to hit 7% from December, the highest level in 40 years. In addition, Fed Chairman Jerome Powell's confirmation hearing and speeches from several other policymakers were also on investors' radar.

 

• CHART OF THE DAY:

The U.S. dollar index fell below 95.7 on Tuesday after Powell addressed the Senate and shattered market expectations for more hawkish policy. The Fed chair says COVID-19 will go a long way, balance sheets will flow later this year, and CVID-19's impact on the labor market may be short-lived. Still, inflation concerns remain, and the Fed will continue to do what is necessary to curb the sharp rise in prices. Meanwhile, U.S. consumer price data due tomorrow awaits so traders can assess further clues about the timing of U.S. interest rate hikes. The U.S. core CPI is expected to rise 5.4% in December, the highest level in decades, up from 4.9% the previous month. • U.S. dollar index (DXY) - D1, Resistance around ~ 97.650, 96.020 Support (target zone) around ~ 94.917, 94.261

 

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