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When the Fed's printers go back to ‘brrrr’

Thu, 12th May 2022 15:00

May 12 - Welcome to the home for real-time coverage of markets brought to you by Reuters reporters. You can share your thoughts with us at markets.research@thomsonreuters.com


No huge surprise here of course but SocGen's permabear strategist Albert Edwards believes the current sell-off will get worse, much worse in fact.

One reason for that is that the Fed's focus is now primarily on inflation and that the situation will need to be very bad indeed for Jerome Powell to throw in a 'put' from his sleeve.

"I think investors will still be shocked when a massive 30% decline in the S&P (and all the associated carnage) doesn't the Fed to deviate from its current aggressive chest-beating stance", he wrote in his latest Global Strategy Weekly note.

"But at a decline of around 40% (close to 3,000 on the S&P), the soothing ‘brrrr’ of the QE printing presses will likely once again be heard", he reckons.

So for those expecting bond yields to go further north, Edwards has news for you!

"I am pretty convinced now that we have just seen the peak of US 10y yields in this cycle at 3.20%", he added as he believes "the imminent reality of global recession will take a firmer grip on market sentiment and pricing".

For the same reason, Edwards thinks there's a very limited number of Fed rates hikes in store.

"What a bizarre world it now is where a Fed Funds rate of only c.1% blows up the market!", he concluded.

(Julien Ponthus)


Data released on Thursday added a few more strokes to a painting depicting a cresting inflation wave.

The prices U.S. companies receive for their goods and services at the proverbial factory door eased as expected last month.

The Labor Department's producer prices index (PPI) increased by 0.5% in April, an abrupt deceleration from the prior month's 1.6% surge, and notched a half percentage point annual slowdown to an even 11%.

Stripping away food, energy, and trade services, so-called "core" PPI also cooled down, albeit not quite as drastically, edging down monthly and year-on-year to 0.6% and 6.9%, respectively.

The report politely follows suit with Wednesday's CPI report and the wage growth component of Friday's jobs report, both of which suggest inflation hit its apex in March.

That's good news for markets, whose wild gyrations in recent sessions reflect worries that an increasingly hawkish Fed could cool the economy right into recession. The prospect of a cooldown could mean Powell & Co's three expected 50-basis-point interest rate hikes in the coming months could be the worst of it.

"While inflation is likely past the peak in the United States, it has gained considerable momentum over the last two years, and is likely to close 2022 well above the Federal Reserve's 2% objective," writes Bill Adams, chief economist at Comerica Bank. "The Fed will want to see clearer evidence that inflation is cooling and higher interest rates are slowing demand before they start thinking about the endpoint of the current rate hike cycle."

The graphic below shows PPI along with other indicators, which do indeed appear to show inflation has halted its ascent beyond the Fed's average annual 2% target:

Separately, the busy Labor Department reported the number of U.S. workers filing first-time applications for unemployment benefits unexpectedly inched nominally higher to 203,000 last week.

Analysts predicted a modest decline.

The increase places jobless claims at the lower edge of a range many economists associate with healthy labor market churn, a welcome development in light of the ongoing worker drought.

But with job openings hovering near record highs, 3.6% unemployment and a low labor market participation rate, the job market remains tight.

"The level (of jobless claims) remains close to multi-decade lows," said Rubeela Farooqi, chief U.S. economist at High Frequency Economics. "Business demand for labor still appears to be strong and combined with persistent shortages should limit the number of layoffs low, for now."

Ongoing claims, reported on a one-week lag, came in below consensus at 1.343 million drifting further below the 1.7 million pre-pandemic level.

Wall Street continued to gyrate, with all three major U.S. stock indexes hopscotching between red and green.

Consumer discretionary stocks were enjoying a rebound from Wednesday's rout.

(Stephen Culp)

U.S. GROWTH STOCKS IN THE RED IN EARLY TRADING (1016 EDT/1416 GMT) U.S. growth stocks traded lower in early trading on Thursday amid persistent concerns that aggressive interest rate hikes by the Federal Reserve could push the world's largest economy into recession.

Megacap stocks Meta Platforms, Microsoft Corp , Google-owner Alphabet Inc, Apple Inc , Amazon.com and Tesla Inc all fell.

Growth stocks, which led Wall Street's rally from the pandemic lows in 2020, have shouldered the shock of this year's selloff, as their returns and valuations are discounted more deeply when rates go up.

A 50 basis-point rate by the Fed is all but a certainty next month, with about 193 basis points in cumulative hikes priced in this year.

The S&P 500 growth index has dropped 25.6% so far this year, and was last down 1.5% on the day. Its yearly decline was a much larger fall than the 8.4% drop in its value counterpart which houses economy-sensitive sectors like banks, energy, and industrials. The value index was last down 0.6%.

Here is the early morning market snapshot:


"Doing good is not antithetical to doing well," said Jeffrey Sonnenfeld, senior associate dean for Leadership Studies at Yale, about his latest research showing that firms that cut ties with Russia over the Ukraine-Russia war saw markedly better shareholder returns.

Almost 1,000 companies have publicly announced they are voluntarily curtailing operations in Russia to some degree beyond the bare minimum legally required by international sanctions, according to the study.

With a letter grade system, the team analyzed stock market performance of companies based on the extent of their presence in Russia. They find that companies that stayed have faced a strong investor backlash and that holds true across regions, sectors and company sizes, while those that left have performed better.

"It could be the market risk, perceptions of a company staying, political uncertainties, reputational risk or some combination of those things but they were handsomely rewarded for pulling out," added Sonnenfeld.

"Surely staying can't be driven by greed because the companies who stay are not being rewarded and it never amounted to very much of their business to start with."

BMO Capital Markets wrote an in-depth note on International Paper Co after it was called out for its "timid" response around Russian investments by the Yale team, saying that "for a firm that makes much of ethics and reputation, Russia appears to have become a huge blind spot."

The initial list of companies staying was flashed on CNBC a few weeks ago where the stocks that got "F" for continuing with business as usual saw their prices fall and underperform the broader markets, according to Steven Tian, the director of research at Yale's Chief Executive Leadership Institute.

(Bansari Mayur Kamdar)


With the yen near a 20-year low against dollar, Barclays says it’s time to buy the Japanese currency, noting that the ultra-dovish Bank of Japan may tweak policy as it faces higher domestic inflation.

“We believe that the most asymmetric part of the latest yen depreciation is behind us,” analyst Shinichiro Kadota said in a report on Thursday.

“Peaking global inflation, increased MoF verbal intervention and the prospect of a BoJ policy change suggest risk is shifting to the downside for USDJPY,” Kadota said.

The yen has tumbled as the Bank of Japan maintains a lonely dovish stance at the same time as other global central banks get increasingly hawkish.

However, it is dropping hints the recent rise in inflation may prove longer-lasting and driven by solid demand, a sign global price pressures are prodding the BoJ to think about a more neutral policy stance.

A Ministry of Finance (MOF) official also said late last month that Japan will take appropriate action in currency markets as recent moves are "extremely worrying."

Barclays said it recommends being short the USDJPY currency pair, a bet that the yen will strengthen against the dollar, at 129.8, with a target of 122 and a stop loss of 134.

The dollar was at 128.65 yen on Thursday, after reaching 131.34 on Monday, which was the highest since April 2002.


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