It doesn’t take much to be happy
Broadly speaking, investors have been clued into their favorite synopsis: The US central bank is regaining control of inflation by capping its key rate at 5% in June 2022, without completely destroying economic growth. It may be a detail to you, but it means a lot to them. In fact, it still depends a little on the details, and I will try to explain it to you. The main takeaway is that what will excite investors is the end of the cycle of monetary tightening by the US central bank. Because it would mean that economic conditions would be more predictable, and the value of money would then stabilize and be more likely to fall than rise.
For the Fed to stop tightening the screw, two key components must come together:
- Slowing inflation. In this sense, it looks good after a few statistics.
- Economic activity showing signs of weakness enough to prevent inflation from re-accelerating in the US. There’s more volatility out there: Among the Yankees, activity in manufacturing and services is under pressure, but household consumption is still strong and the labor market is still heating up.
But on Friday, three indicators came in to feed the second point mentioned above, specifically the December employment report. At first glance, it didn’t look like it was won, despite job growth and unemployment falling from 3.7% to 3.5%. This is where it gets thin. Digging a little deeper, economists discovered elements that indicate change is underway. Temporary employment suffers (companies part with precarious workers when they sense the tide is turning) and wage growth weakens. In fact, the jobs report received a mixed reception, as maintaining a low unemployment rate is not a particularly good indicator of an economic slowdown. But this was followed by a free fall in the services activity index (ISM services) and a drop in factory orders (even if this indicator is considered secondary by Wall Street).
Maybe I lost you on the way. But the bottom line is that the market thinks the Fed won’t go far enough with interest rate hikes to curb inflation and continue a more dovish policy. So is the bond market, where the yield on 10-year debt has fallen to 3.56%. And the currency market, which has seen the dollar rise nicely. The story helped push the S&P500, Dow Jones and Nasdaq up more than 2% Friday night. Backing that up is Thursday’s US inflation figures for December. However, beware, Fed chief Jerome Powell will finally have an opportunity to refocus the debate during a speech scheduled for Tuesday. We know that the central bank has recently tried to calm investors’ appetite for risky assets. Powell’s message will carry weight.
Finally, the first trading week of 2023 ended with a gain of 1.45% for the S&P500 and 4.6% for its European counterpart, the Stoxx Europe 600. falling energy prices as a result of an abominably mild winter have reinvigorated the troops.
Here’s some information to keep in mind to start the week:
- In Brazil, tens of thousands of supporters of Jair Bolsonaro have occupied and destroyed several major official buildings in Brazil in protest against Lula’s election. I imagine that the looting of parliaments in democratic countries is not a very positive sign.
- In the United States, Republican Kevin McCarthy has finally been elected speaker of the House of Representatives after 15 votes against the hardline wing of his camp. Obviously, at the price of many concessions.
- Chinese can travel again after dramatic easing of domestic covid-related restrictions. Optimists see this as a great opportunity for international trade. Pessimists are brewing a new potential pandemic.
- In Europe, the first quarterly editions are already visible with Sika (Wednesday) and Tesco (Thursday). In the US, the session on Friday, January 13 will include announcements from JPMorgan Chase, UnitedHealth, Bank of America, Wells Fargo, BlackRock, Citigroup and Delta Air Lines.
- The Japanese market is closed for a public holiday.
Asia-Pacific markets are rising this morning after Friday’s earnings on Wall Street. Shanghai gains 0.8%, Hong Kong 1.8%, Seoul 2.6% and Bombay 1.5%. It weighed more heavily in Australia, where the ASX closed up 0.6%. Europe’s leading indicators point to the beginning of an upswing.
Economic highlights of the day
Although German industrial production (8:00 am) and European unemployment rates (11:00 am) are to be followed, today does not appear to be a big indicator. The whole agenda is here.
Euro strengthens to $1.0677. An ounce of gold goes back to 1877 USD. Oil is firm, with North Sea Brent at $79.50 a barrel and US WTI light oil at $74.93. The yield on the US 10-year debt fell to 3.56%. Bitcoin rose around $17,200.
Major changes in recommendations
- Adyen: KeyBanc is moving from overweight to online weight.
- BT Group: Citigroup switches to buy from neutral, targeting 160GBp.
- Byggfakta: Jefferies remains long with target raised from SEK 45 to SEK 52.
- Compagnie Financière Richemont: UBS remains buy with a price target raised from CHF 146 to CHF 154.
- Ericsson: Handelsbanken shifts from buy to hold.
- Geberit: Goldman Sachs switches to neutral from sell, targeting CHF 466.
- Getlink: Societe Generale switches from sell to hold with a target of €16.50.
- Lonza: Jefferies is long with a price target cut from CHF 675 to CHF 575.
- Mondi: Jefferies remains long with target price cut from 1,750 to 1,730 GBp.
- OC Oerlikon: UBS remains buy with price target lowered from EUR 10.20 to EUR 9.40.
- Permanent TSB: KBW moves from market perform to outperform, targeting EUR 3.
- Rathbones: Jefferies moves from hold to underperform, targeting 1720GBp.
- Renault: Citigroup moves from buy to neutral, targets €39.
- Sodexo: Jefferies maintained with a price target raised from EUR 88 to EUR 96.
- SUSE: Jefferies remains long with a target raised from EUR 20 to EUR 21.
- Swatch Group: UBS remains neutral with a price target raised from CHF 233 to CHF 287.
- TotalEnergies: Goldman Sachs switches from buy to neutral with €73 target.
- YouGov: HSBC starts monitoring for acquisition, targeting 1225GBp.
Important (and less important) announcements
- Bernard Charlès becomes CEO of Dassault Systèmes, assisted by Pascal Daloz as CEO.
- TotalEnergies will lower energy prices for small businesses following a request from the Elysée.
- Hermès is strengthening its presence in Nanking.
- Danone sued by NGOs over plastic pollution in France.
- Bbpifrance buys more than 5% of Elis.
- Euroapi invests €40 million in vitamin B12 production in Normandy.
- Ipsen buys American biotechnology Albireo for $952 million.
- Nikox wants to go to Euronext Growth.
- Airwell Group issues €5 million of 2028 bonds in favor of Delta AM through the France Economie Réelle fund.
- Requires lysogen intake.
- Figeac Aero and Cogra have published their accounts.
In the world
Important (and less important) announcements
- Eisai and Biogen have received accelerated marketing approval from the US for a $26,500-a-year treatment for Alzheimer’s disease.
- According to Bloomberg, Goldman Sachs will cut about 3,200 jobs this week as part of a restructuring program.
- Qatar Energy and Chevron join forces on $6 billion petrochemical plant.
- Stora Enso has completed the acquisition of the De Jong Packaging group for EUR 1.02 billion.
- Silchester becomes WPP’s third shareholder and can demand the resignation of its chairman.
- Alibaba plans to invest 1 billion dollars in Turkey.
- FDA reports potential ineffectiveness of new Omicron subvariant of AstraZeneca’s COVID-19 drug.
- Sartorius AG’s CEO expects less technological openness with China.
- Autoneum buys Borgers for 117 million euros.
- Otsuka and Lundbeck Receives FDA Priority Review for Brexpiprazole for the Treatment of Agitation Associated with Alzheimer’s Dementia.
- Macy’s estimates its Q4 2022 revenue to be at the low end of guidance.
- Jack Ma no longer controls Ant Group.
- Oracle, Verizon, AT&T, Intuit, Repsol, Equinor and Barry Callebaut all pay dividends.
- Key publications of the day: Jefferies Financial, Tilray… The whole agenda is here.