Equities extend rally following a tame inflation report

The war in Ukraine has tended to increase uncertainty regarding inflation and growth prospects. When and with what consequences this war will end is pure speculation, but capital markets are expected to build a certain immunity to the headline risks in the coming weeks. The medium- to long-term consequences, on the other hand, could be significant. It is possible that we are at the beginning of a new bloc formation or a new Cold War. This would put a significant damper on globalization and further fuel higher structural inflation. 

US equities finished higher on Thursday in the wake of a consumer prices report that showed inflation cooled last month.  However, the gains were tempered, as the core rate, which strips out food and energy costs, rose on a monthly basis.  Employment figures were also in focus, with jobless claims dipping slightly and coming in better than expected.  The Dow Jones Industrial Average rose 0.6% to 34,190, the S&P 500 Index gained 0.3% to 3,983, and the Nasdaq Composite increased 0.6% to 11,001.  European equities continued their strong start to 2023, with the Euro Stoxx 50 advancing another 0.7%. 

Summary as at 13.01.2023 

• Asian equity markets mostly rose this morning, as investors reacted to data showing China’s exports and imports declined sharply in December amid weakening demand, while the Bank of Korea raised its policy rate by 25 basis points in a widely expected move.  Shares in Australia, South Korea, Hong Kong, and mainland China advanced, while Japanese equities fell amid a sharp drop in Fast Retailing shares which missed profit estimates.  
• European and US equities are set to take a breather following a rally spurred by moderating US inflation, with the focus now turning to earnings from the big US banks. 

• Oil prices were marginally lower on Friday but still on track to gain about 6% this week underpinned by an improving demand outlook in China and hopes for less aggressive interest rate hikes from the US Federal Reserve.  China ramped up crude purchases this week after it issued a new quota, and consumption is expected to surge to a record this year following the country’s exit from its zero-Covid policy. 
• The US dollar tumbled to a nearly 9-month low against the euro yesterday as the release of a tame inflation reading lifted expectations that the Fed Reserve will be less aggressive going forward in raising rates. 
• The Fed is on track to downshift to smaller interest-rate increases going forward, though it’s likely to keep hiking until price pressures show more definitive signs of slowing.  Philadelphia Fed President Patrick Harker said rate hikes of a quarter-percentage point “will be appropriate going forward,” following bigger increases throughout most of 2022.  Harker’s comments echoed remarks a day earlier from Susan Collins, his counterpart at the Boston Fed. 
• China’s exports tumbled 9.9% year on year in December, declining the most in nearly three years while imports shrank 7.5%, falling for the third straight month, due to deteriorating demand at home and aboard.  For 2022, sales surged 7% while purchases were up 1.1%, amid robust trade with Russia and Southeast Asia countries, bringing a Chinese trade surplus of USD 877.6 billion. 
• The Consumer Price Index in the US ticked 0.1% lower month over month in December, matching the consensus estimate, and versus November’s unrevised 0.1% increase.  The core rate rose 0.3% month on month, in line with expectations and versus November’s unadjusted 0.2% rise.  Compared to last year, prices were 6.5% higher for the headline rate, matching estimates and from the prior month’s unrevised 7.1% rise.  The core rate was up 5.7% year on year, in line with projections, and versus November’s unadjusted 6.0% rise. 

• US weekly jobless claims came in at a level of 205,000 for the week ended January 7, below estimates of 215,00 and compared to the prior week’s upwardly revised 206,000 level.  The four-week moving average decreased by 1,750 to 212,500, and continuing claims for the week ended December 31 fell by 63,000 to 1,634,000, south of estimates calling for 1,710,000.  
• American Airlines Group boosted its Q4 EPS guidance and also raised its revenue outlook.  The air carrier noted that total revenue per available seat mile is expected to be up about 24% compared to the same period in 2019 and higher than its previous guidance and that its debt reduction initiative is well ahead of its goals. 
• KB Home reported Q4 EPS of $2.47, below the Street estimate of $2.86, with revenues rising 16% year on year to $1.9 billion, slightly south of the consensus forecast of $2.0 billion.  The homebuilder said while favorable demographics and a prolonged undersupply of homes gives it confidence in the housing market’s long-term outlook, current conditions remain challenging. It added that higher mortgage rates and persistent inflation, together with an uncertain economy, have made homebuyers more cautious since the middle of last year. 
• China is moving to take “golden shares” in local units of Alibaba and Tencent as a way to remain involved in their business, particularly the content they broadcast to millions of Chinese people.  The stakes, usually involving a 1% share of internet groups’ key entities, are akin to “golden shares” as they come with special rights over certain business decisions.  
• Tesla cut the prices on its top-selling electric vehicles for the US market this morning, the automaker’s website showed.  The price cuts on the Model 3 and Model Y ranged between 6% and 20% on the prices that were held before the discount.