InvestMacro

By JustMarkets

The US stock market did not trade yesterday due to the holiday. But futures on indices traded in the European and partly in the US session. By the close of the futures market on Monday, the indices were down a bit, so the stock market’s opening on Tuesday will be accompanied by a price gap.

Traders should not forget that it is the earnings season in the United States. Such companies as Morgan Stanley (MS), Goldman Sachs (GS), Interactive Brokers (IBKR), and United Airlines Holdings (UAL) are reporting today.

Equity markets in Europe were mostly up yesterday. German DAX (DE30) gained 0.31%, French CAC 40 (FR40) added 0.28%, Spanish IBEX 35 (ES35) fell by 0.12%, and British FTSE 100 (UK100) closed on Monday with a 0.20% gain.

Short-term interest rate differentials are a good indicator of the future trajectory of relative monetary policy cycles. Using central bank policy projections, economists expect the two-year EUR/USD swap differential to reverse this year. Right now, swaps are trading at about 125 basis points in favor of the dollar, and by the end of this year, that differential could change to 40 basis points in favor of the euro. If this materializes, the EUR/USD currency pair will reach the 1.20 level before the end of the year.

In Europe, a surprisingly warm winter led to a drop in natural gas prices. Europe may come out of the heating season with more than 50% of its storage capacity filled. This could limit the jump in natural gas prices in the second half of 2023 to around €140-160/MWh. This is still high but well below the €250-300/MWh level seen last summer.

Goldman Sachs raised its aluminum price forecast due to rising demand in China and Europe. According to analysts, the metal is likely to cost an average of $3125 per tonne this year. However, it is pointed out that the upward price impulse will gradually increase in the spring.

Oil prices fell on Monday, consolidating after a strong rise last week ahead of the publication of demand forecasts from OPEC and IEA. These monthly reports strongly influence oil market trends in global oil demand. They may be essentially this month, given the importance the market attaches to a potential recovery in oil demand in China.

Asian markets traded flat yesterday. Japan’s Nikkei 225 (JP225) decreased by 1.14% on Monday, China’s FTSE China A50 (CHA50) added 1.50%, Hong Kong’s Hang Seng (HK50) was up by 0.04% on the day, India’s NIFTY 50 (IND50) fell by 0.34%, and Australia’s S&P/ASX 200 (AU200) was positive by 0.82%.

China’s GDP growth slowed in the latest quarter to +2.9% year-over-year, down from +3.9% in the previous quarter. But industrial production rose by 1.3% last month, while the unemployment rate fell to 5.5% from 5.7%. Analysts say rising domestic demand in China could be an important counterbalance to slowing growth in the US and Europe. Investors are once again buying up Chinese blue chips, from large consumer goods to financial companies. China’s stock market rally underscores expectations of an economic recovery at a time when most developed countries are in a recession. Foreign capital inflows into China reached about 44 billion yuan last week, the highest since May 2021.

There is a growing possibility that the Bank of Japan may announce a significant policy change this week as bond yields reach the upper limit again. According to economists, there are two options at the moment. The first (main scenario) is the abolition of the yield curve control policy. This might lead to a sell-off in Japanese equities, which would strengthen the yen. The second scenario is that Japan’s central bank can extend the range to 75 basis points on either side of its 0% target for 10-year government bonds. This would save time until the end of the quarter when Kuroda resigns. Either way, the closer we get to spring, the more likely the Bank of Japan will change course.

S&P 500 (F) (US500) 3,999.09 0 (0%)

Dow Jones (US30)34,302.61 0 (0%)

DAX (DE40) 15,134.04 +47.52 (+0.31%)

FTSE 100 (UK100) 7,860.07 +16.00 (+0.20%)

USD Index 102.39 +0.19 (+0.18%)

• – China GDP (q/q) at 04:00 (GMT+2);
• – China Industrial Production (m/m) at 04:00 (GMT+2);
• – China Retail Sales (m/m) at 04:00 (GMT+2);
• – China Unemployment Rate (m/m) at 04:00 (GMT+2).
• – UK Average Earnings Index (m/m) at 09:00 (GMT+2);
• – UK Claimant Count Change (m/m) at 09:00 (GMT+2);
• – UK Unemployment Rate (m/m) at 09:00 (GMT+2);
• – German Consumer Price Index (m/m) at 09:00 (GMT+2);
• – World Economic Forum Annual Meetings at 10:00 (GMT+2);
• – German ZEW Economic Sentiment (m/m) at 12:00 (GMT+2);
• – Eurozone ZEW Economic Sentiment (m/m) at 12:00 (GMT+2);
• – Canada Consumer Price Index (m/m) at 15:30 (GMT+2);
• – US NY Empire State Manufacturing Index (m/m) at 15:30 (GMT+2);
• – US FOMC Member Williams Speaks at 22:00 (GMT+2).

By JustMarkets

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.

By JustMarkets

The Dow Jones Index (US30) increased by 0.40% (+1.90% for the week), and the S&P 500 Index (US500) added 0.40% (+2.26% for the week) at the close of the stock market on Friday. The Technology Index NASDAQ (US100) gained 0.71% on Friday (+3.91% for the week). All three indices closed in positive territory on last week’s results.

The University of Michigan consumer survey on Friday showed that Americans’ inflation expectations for the year ahead fell for the fourth straight month in January, falling to 4.0% from 4.4% in December. According to the survey, this is the lowest price pressure since April 2021.

Atlanta Federal Reserve Bank President Rafael Bostic said he is leaning toward supporting a small interest rate hike at the Fed’s next meeting after Thursday’s report showed a further slowdown in inflation. This coincides with other comments from Fed officials. In fact, most Fed policymakers (except Bullard, who has always been more hawkish) agree to reduce the rate hike to 0.25%. Fed officials expect interest rates to exceed 5% this year and remain at that level until 2024, according to projections.

Investors will keep a close eye on the start of the reporting season this week to see if US companies can beat estimates amid concerns. Goldman Sachs (GS) and Morgan Stanley (MS) are due to report earnings before the opening on Tuesday, followed by Procter & Gamble (PG) and Netflix (NFLX) on Thursday. According to Refinitiv, annual earnings for S&P 500 companies are expected to fall by 2.2% for the quarter. This will be the first quarterly decline in US earnings since the third quarter of 2020,

Stock markets in Europe were mostly up Friday. Germany’s DAX (DE30) increased by 0.19% (+2.97% for the week), France’s CAC 40 (FR40) added 0.69% (+2.36% for the week), Spain’s IBEX 35 (ES35) jumped by 0.61% (+2.19% for the week), the British FTSE 100 (UK100) closed Friday up by 0.64% (+1.88% for the week).

The British GDP grew by 0.1% last month, while it was expected to decline by 0.2%. Despite the positive data, analysts point out that GDP has shrunk by 0.3% in the last three months and economists believe that a recession can only be postponed but not prevented. Moreover, the effects of the Bank of England’s monetary tightening have yet to affect the economy fully. Along with the corporate tax hike to 25% and the expiration of the tax credit for new investments, the economy will only shrink.

Fitch Ratings raised its outlook for the ECB’s policy rates as the Central Bank became much more concerned about core inflation pressures and signaled that rates would reach higher levels. Economists believe the ECB will raise the refinancing rate (MRO) to 4% (previously: 3%) by May 2023, and the deposit rate (DFR) will reach 3.5%. In total, there will be a 150 basis point increase in 1H 2023, starting with 50 basis points at each of the ECB meetings on February 5 and March 16, 2023.

Gold prices rose last week after the December inflation data release. Gold has approached a nine-month high and is trading near the key resistance at $1,950 an ounce. The US dollar continues to fall, which positively affects the precious metals, which are inversely correlated to the dollar and US government bond yields. Gold prices are rising as analysts believe the Fed is at the end of its rate hike cycle.

The US inflation easing play is also helping oil bulls, although rising oil prices alone could eventually lead to higher inflation. WTI crude oil increased by 8.54% over the past week. British Brent crude for March delivery added 8.73% for the week in London trading on Friday.

Asian markets were mostly up last week. Japan’s Nikkei 225 (JP225) gained 1.47% over the week, China’s FTSE China A50 (CHA50) gained 3.13%, Hong Kong’s Hang Seng (HK50) increased by 2.08%, India’s NIFTY 50 (IND50) declined by 0.19%, and Australia’s S&P/ASX 200 (AU200) added 3.07%.

The Bank of Japan (BOJ) may adjust its yield control policy to roll back monetary stimulus this year if wage increases continue to spread. The BOJ may also slightly revise its inflation forecasts for the fiscal year beginning in April as companies continue to raise prices on a wide range of goods. Markets are still reeling from rumors that the Bank of Japan will soon abandon its Yield Curve Control (YCC) policy and begin raising interest rates.

In the commodities market, futures on lumber (+18.01%), gasoline (+13.05%), Brent oil (+8.73%), WTI oil (+8.54%), copper (+7.84%), sugar (+4.01%), corn (+3.33%) and gold (+2.85%) showed the biggest gains last week. Futures on natural gas (-6.17%), coffee (-4.86%), cotton (-3.82%), and platinum (-2.65%) showed the biggest drop.

S&P 500 (F) (US500) 3,999.09 +15.92 (+0.40%)

Dow Jones (US30)34,302.61 +112.64 (+0.33%)

DAX (DE40) 15,086.52 +28.22 (+0.19%)

FTSE 100 (UK100) 7,844.07 +50.03 (+0.64%)

USD Index 102.18 -0.07 (-0.06%)

• – World Economic Forum Annual Meetings at 10:00 (GMT+2);
• – UK BoE Gov Bailey Speaks at 17:30 (GMT+2);
• – Canada Business Outlook Survey at 17:30 (GMT+2).

By JustMarkets

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.

By Edouard Wemy, Clark University 

Economists worried about soaring inflation got some good news to start the year: The rate of inflation has eased. The first report card of 2023 on consumer prices, released on Jan. 12, showed that the overall cost of goods and services decelerated to an annual pace of 6.5% in December, the slowest in over a year and down from 7.1% in November.

But there’s bad news too, especially if you are an egg-munching renter fond of frequent regular haircuts. In quite a few categories, the cost of living rose at an even faster pace.

That’s because price inflation isn’t uniform. Different products and services are affected by myriad factors. So while some prices may have fallen during December, slowing the annual rate of inflation, other items kept getting more expensive.

The Conversation asked Edouard Wemy – an economist from Clark University who never sets off to work without his morning breakfast of two eggs, sunny side up – to explain how different items in the consumer price basket fared in the latest inflation report.

Energy

When you look at the detail of the latest report on the consumer price index, you’ll see that overall energy costs declined. That’s because there was a steep decline in gasoline prices – down 9.4% in the month of December after dropping 2% in November.

While that’s good news, it’s a bit puzzling. AAA was expecting demand for gasoline to be very high over the month, which usually happens in winter. This typically pushes prices up. My best guess is either demand wasn’t as strong as expected due to fears of a coming recession or there has been an easing on the supply constraints that has contributed to pushing the price of gas up.

An exception to this downward energy price trend was in energy services – that is, electricity and piped gas – where prices actually ticked up. The reason is largely due to the rising cost of doing business. Utility companies and pipeline services are suffering as a result of higher labor costs and are passing on the added cost to consumers through higher prices. The latest jobs report shows average hourly earnings rose 4.6% in December from a year earlier.

Groceries

Overall food inflation slowed in December, with the cost of groceries rising just 0.2% in the month – down from 0.5% in November.

But there is a lot of variation in the cost of grocery items. While the price of fruits and vegetables fell in December, the cost of eggs jumped by 11.1%. That’s due to an outbreak of bird flu that could well last until into the summer.

In addition to that, farms are seeing the same wage pressures as other businesses, which are then passed on to consumers.

Housing

The cost of shelter, whether from renting or owning, rose 0.8% in December – the biggest one-month gain since the 1980s.

This is understandable given the numerous interest rate hikes during 2022. Rising interest rates means that taking out a home loan is more costly, which in turn pushes more people into renting. Added demand on rental properties in turn pushes the prices that landlords demand up.

When interest rates eventually drop, it should bring the overall cost of shelter down, as it would encourage more people to buy homes. But I’m not optimistic that rates will fall until 2024, so don’t expect any downward movement on shelter in the coming months.

Hospital visits

The cost of going to the hospital was another category that saw a big increase. Average prices for hospital and related services jumped 1.5% in December, the biggest gain since 2015.

Again, this is due to the rising cost of doing business – that is, upward pressure on wages – coupled with still-high energy costs.

Used cars and trucks

Another category that helped the overall pace of inflation slow down is used cars and trucks.

After soaring throughout the initial phase of the COVID-19 pandemic, used car prices have been plunging in recent months. They fell 2.5% in December, putting the annual decline at 8.8%. The cost of new cars also dropped in December.

About the Author:

Edouard Wemy, Assistant Professor of Economics, Clark University

This article is republished from The Conversation under a Creative Commons license. Read the original article.