U.S. equity indexes climb: Nasdaq out front, up ~1.2%
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Real estate up most among S&P 500 sectors; staples weakest group
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Dollar edges up; gold edges down; bitcoin slips; crude up >3%
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U.S. 10-Year Treasury yield falls to ~3.58%
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FED FUNDS PEAK, ENERGY BOTTOMING: BARCLAYS’ TOP THEMES FOR 2023 (1222 EST/1722 GMT)
A fed funds peak, faster than expected reopening in China and bottoming energy prices all hold investment opportunities this year, according to Barclays Capital, which has listed its top seven macro themes for 2023. These are:
1. The fed funds rate peaks and stays restrictive. While higher rates will put cyclical pressure on assets and the economy, Barclays sees volatility and uncertainty in U.S. rates declining and says that should reduce the risk premium to quality sectors of the equity market. One way to play this is to be overweight “quality stocks” versus the broad S&P index.
2. China reopens faster than expected. As China dismantles its COVID-related restrictions it also looks unlikely to return to lock-downs and COVID-zero policies. Despite facing economic challenges, the reopening is likely to trigger “a substantial acceleration in consumer spending growth.” China-sensitive stocks have more room to gain.
3. Energy prices nearing a bottom. Warm weather and a slump in demand due to a decrease in China’s mobility have held down energy prices, but as China reopens that “is swiftly changing.” Geopolitical risks from Russia adds to uncertainty and the U.S. Strategic Petroleum Reserve will need to be refilled. Barclays expects U.S. West Texas Intermediate (WTI) crude to rise near $100 per barrel for the fourth quarter on average and sees the WTI curve for Q4 as “especially mispriced.”
4. Yen has room to run. While the Bank of Japan in December made its first step towards exiting yield curve control, the shift hasn’t yet been fully priced into the currency. The possible peak in U.S. rates also likely caps the downside in long yen positions against the dollar. Barclays says that “the currency is still cheap against the USD.”
5. The end of European austerity. The austerity that dominated the past decade is over as Europe invests in the transition to energy security and net zero and increases defense spending, among other factors. The periphery, and especially Greece, look set to benefit and Barclays notes that “Greek government bonds look cheap.”
6. EM to outperform. Inflation has peaked in many emerging markets while U.S. dollar strength and high U.S. rates volatility, a headwind for the sector in 2022, is also likely at or near an end. EM central banks were the first to hike, and some are likely finished their tightening cycle. More stability in the U.S. will allow these central banks to decouple from the Fed and some have room to cut. Barclays recommends “selectively receiving EM rates” noting the Bank of Mexico is likely near the end of its cycle. It adds that the Indian rupee is cheap to the dollar.
7. Look to India. India “is likely going to be one of the fastest-growing major economies over the next few years,” Barclays said, adding that the country will contribute a large share of global growth next year. Indian stocks still have upside, with much of the world under-invested and under-exposed to Indian assets.
MORTGAGE DATA OFFERS CPI APPETIZER (1155 EST/1655 GMT)
In a prologue to Thursday's inflation data, investors had little economic food to chew on Wednesday, aside from a housing market morsel courtesy of the Mortgage Bankers Association (MBA).
The average 30-year fixed contract rate shed 16 basis points last week to land at 6.42%, aping benchmark Treasury yields' rocky but generally downward trend since October.
While that wasn't enough to entice potential homebuyers - applications for loans to purchase homes dipped 0.5% - it did light a fire under the refi side, which saw demand jump by 5.1%, for a net gain in mortgage applications of 1.2%.
The easing cost of home financing came "as markets reacted to data showing a weakening economy and slowing wage growth," writes Joel Kan, deputy chief economist at MBA. All loan types in the survey saw a decline in rates, who noted that the last time the purchase index dipped to current levels was in 2014.
Seen below, overall mortgage demand has plunged 67.8% from the same week a year ago:
Echoes of the COVID-driven demand boom continue to reverberate through the housing market, with home price growth still hot - albeit cooling - and tighter financing conditions due to the Fed's restrictive policy rates causing the prospect of home ownership to fade for many potential buyers.
The big housing chill has shown up in a swath of recent indicators, including homebuilder sentiment, pending and actual home sales, building permits, potential buyer traffic and spending on residential construction projects.
Housing data in general tends to be a leading indicator, somewhat predictive as to the general direction of the economy.
And so far, the broader economy appears to be softening but resilient - especially in the labor market, as evidenced in Friday's robust December jobs report.
This is particularly true in the current topsy-turvy Federal Reserve tightening cycle, which is attempting to throw cold water on demand to bring down decades-high inflation, where signs of economic softness - but not too much of it - is greeted as a sign the Fed's tactics are working.
Which brings us to the Labor Department's hotly anticipated consumer prices (CPI) report expected Thursday.
Economists polled by Reuters expect headline CPI to be unchanged from November, and up 6.5% year-over-year, a 0.6 percentage point cool-down.
Stripping out volatile food and energy prices, so-called "core" CPI is seen heating up on a monthly basis, to 0.3% from 0.2% the month prior, but easing 0.3 percentage points to 5.7% over December 2021.
Here we see core CPI along with other indicators, and how far most of them have to fall before approaching Powell & Co's average annual 2% inflation target, which, in theory, has to happen before the central bank does the dovish pivot dance, easing rates back to "neutral" policy levels.
If the report hits the consensus bull's eye, it will mark the 13th straight month where consumer prices ran hotter than wage inflation, resulting in a year-and-a-month of "real wage" declines.
The American consumer, who carries about 70% of the economy on their collective back, is feeling the pinch, with saving rates and historical lows and relying on plastic debt to pay for essentials.
This graphic compares wage growth to CPI components representing essentials. While wage inflation remains hot at 4.7%, rent, services and food are running hotter, particularly groceries, which were up a staggering 12% in November (gasoline prices have been conspicuously omitted due to scale considerations).
Wall Street is in a green mood in late morning trading, with interest rate sensitive mega-caps doing the heaviest lifting, perhaps suggesting investors are hopeful of a nice, refreshingly cool CPI report.
HOW BAD CAN THE U.S. RECESSION BE? (1046 EST/1546 GMT)
As the world waits for U.S. consumer-inflation figures expected on Thursday, markets are hopeful for signs of cooling that would pile onto the optimism surrounding slowing wage-growth numbers that came out last week.
It obviously is unusual to be happy about economic activity weakening in a post-COVID environment. But traders seem to be embracing the contraction on hopes that a cooling economy could ward off a Federal Reserve that is racing to rein in inflation by hiking rates in record time.
"The rapid increases in interest rates, the most damaging factor of 2022, are likely behind us. Most of the adjustments to the economy and markets may have already been done," said Brad McMillan, chief investment officer at Commonwealth Financial Network.
"With slower growth and inflation, we could see valuations stabilize and may even see appreciation as fears about earnings growth moderate."
The biggest worry at the moment is the hawkish Fed cannot ensure a "soft landing" for the U.S. economy with the manufacturing sector entering into contraction territory.
This would mean that the entire global economy would follow suit confirming the World Bank's and IMF's outlooks.
But McMillan writes in a note that, though a recession is expected this year, it would be fairly mild given the strength of the U.S. labor market. Moreover, stock valuations and earnings should stabilize with a healthier consumer economy and that should aid market sentiment.
But, the fear of the unknown still lingers leaving room for market volatility given the war in Ukraine, pandemic resurgence fears out of China and domestic political instability in the U.S.
In any event, a lot may boil down to the U.S. CPI numbers on Thursday and the consequent rate hike decision next month.
U.S. STOCKS HIGHER AS NASDAQ SHOOTS FOR FOUR STRAIGHT (1017 EST/1517 GMT)
U.S. stocks are advancing in early trade on Wednesday, with the Nasdaq attempting a fourth-straight session of gains as investors looked toward inflation data on Thursday for insight on the path of the Federal Reserve's rate hike path.
Nearly all of the 11 S&P sectors are higher with the exception of energy and consumer staples, while gains are led by consumer discretionary and real estate. The Nasdaq is on track for its longest streak of daily gains since early September.
Thursday's consumer price index (CPI) for December is expected to be flat on a month over month basis, while a rise of 6.5% is forecast on an annual basis. Core CPI is expected to rise 0.3% on a monthly basis and 5.7% annually.
Below is your market snapshot:
GROWTH VS VALUE: IT'S ALL STARTING TO TASTE THE SAME (0855 EST/1355 GMT)
In 2022, S&P 500 Growth turned in its worst yearly performance relative to S&P 500 Value in its history.
And although early in 2023, growth's losing ways vs value have continued: the IGX/IVX ratio ended Tuesday at its lowest level since January 31, 2020:
In the event the ratio is still destined to test the support line from its 2007 trough, growth may still face rough sledding relative to value in 2023.
Growth's misfortunes last year were tied to concentrations in tech and FANGs. The tech sector fell 29% in 2022, while NYFANG tumbled 40%. This, amid a serious growth-stock multiple contraction as the Fed has been relentlessly hiking rates in order to tame decades high inflation.
Meanwhile, value held up better last year given its large financial sector exposure. SPSY only declined around 12% in 2022.
One aspect to keep in mind early in the new year, however, is given last year's unraveling of the more traditional growth sectors, coupled with energy's strong growth and momentum, top holdings and concentrations in growth and value have started to blend together.
For example, as of December 31, Microsoft was the top holding in the SPYV at just shy of 5%, and the second biggest individual stock weighting in the SPYG at just over 6%.
Additionally, another NYFANG member, Amazon.com also found itself in the top 10 holdings of both the SPYG and the SPYV.
NYFANG member Meta Platforms was a top 10 holding in value, as was traditional tech-stalwart Cisco Systems .
And the shifts continue, as oil giant Exxon Mobil assumed a top-10 position in growth.
With this, the FANG-sectors: tech, consumer discretionary , and communication services had a 50% SPYG weighting, but also accounted for nearly 35% of SPYV's exposure.
Energy had about a 9% weighting in growth vs 2% in value.
The groups that appear to perhaps more clearly delineate the line between growth and value are financials and healthcare . As of December 31, financials were 21% of value vs about 5% for growth, while healthcare was 21% of growth vs 9% of value.
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