Equities seen rallying on Fed disinflation talk

The war in Ukraine has increased 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 significantly damper globalization and further fuel higher structural inflation. 

US equities came well off the lows of the day yesterday to finish higher, as investors shook off the Fed’s decision to raise rates for a seventh time.  The Central Bank opted to raise its target by only 25 basis points, while in his presser Chairman Powell appeared somewhat dovish, alluding to the possibility that it may be near the end of its rate hike campaign. Meanwhile, the markets also digested a batch of economic data that showed manufacturing activity continued to contract, ADP private sector employment grew at a slower pace than anticipated, job openings unexpectedly rose, mortgage applications snapped a three-week winning streak, and construction spending surprisingly declined.   Q4 earnings season continues to heat up, with Snap reporting a larger-than-expected loss and suggesting current quarter revenues may decline for the first time, though Advanced Micro Devices topped quarterly estimates.  The Dow Jones Industrial Average ended flat, the S&P 500 rose 1.1% to 4,119, and the Nasdaq Composite jumped 2.0% to 11,186.  European markets finished mixed, with the Euro Stoxx 50 managing to nudge a small gain of 0.2% to finish at 4,171. 

Summary as at 02.02.2023 

• Asian equity markets mostly rose on Thursday as investors assessed data showing annual inflation in South Korea rose to a three-month high in January despite forecasts for further easing, while building permits in Australia rebounded sharply in December. Shares in Australia, Japan, South Korea and Hong Kong advanced, while mainland China stocks declined. 
• European and US equities are set to power ahead later today after dovish comments from Fed Chair Jerome Powell. 

• Oil prices rose this morning as the US Federal Reserve delivered a more moderate 25 basis point rate hike and said it has made progress in the fight against inflation, pushing the dollar lower and making greenback-priced commodities cheaper for foreign buyers. On the supply side, an OPEC+ committee recommended keeping crude production steady, citing uncertainty about the impact of China’s economic reopening and the latest sanctions on Russian supply.   
• The Federal Reserve raised the target range for the fed funds rate by 25bps to 4.5%-4.75% in its February 2023 meeting, dialling back the size of the increase for a second straight meeting. During the regular press conference, Chair Powell indicated that it was his base case that economic growth will continue this year and that it may take only “a couple more” rate hikes to get to an appropriately restrictive stance. 
• Private sector payrolls in the US rose by 106,000 jobs in January, below forecasts calling for a 180,000 gain, while the prior month’s figure was upwardly revised to a 253,000 increase. The report, which does not include government hiring and firing, comes ahead of Friday’s broader January nonfarm payroll release, expected to show a headline and private sector job growth both rose by 190,000 and the unemployment rate to tick higher to 3.6% from 3.5% while average hourly earnings are projected to rise 0.3% month-over-month. 
• The January ISM Manufacturing Index in the US showed that manufacturing activity fell further into contraction territory. The index declined to 47.4—the lowest reading since May 2020—from the prior month’s unrevised 48.4 reading, and versus estimates calling for a dip to 48.0.  
• The January Eurozone consumer price inflation report that prices unexpectedly declined on a monthly basis and the year-on-year rate slowed more than anticipated to an 8.5% pace. However, the core yoy rate came in above estimates at a 5.2% pace, matching the prior month and above the forecasted 5.1% rate.   

• The euro area seasonally-adjusted unemployment rate was 6.6% in December, stable compared to November and above market forecasts of 6.5%. The number of unemployed increased by 23 thousand from a month earlier to 11.048 million. Meanwhile, the youth unemployment rate, measuring job-seekers under 25 years old, was unchanged at 14.8 per cent. Amongst the largest Euro Area economies, the highest jobless rates were recorded in Spain (13.1%), Italy (7.8%) and France (7.1%), while the lowest rates were recorded in Germany (2.9%). 
• In extended trading, Meta surged nearly 20% after reporting a stronger-than-expected fourth revenue and announcing a $40 billion stock buyback.   
• Banco Santander SA said that it expects higher profitability in 2023 after the bank reported a broadly flat net profit for Q4.  The bank said it is targeting double-digit revenue growth and a return on tangible equity above 15% in 2023.   Loan loss provisions more than doubled in the quarter but were still slightly below expectations while net interest income rose 17% in line with analysts’ forecasts.