Inflation continues to dash rate-cut hopes

Equities retreated on Friday following an unexpected surge in the producer price index, driving up bond yields and the dollar. January’s inflation rise tempered rate cut expectations, with markets now anticipating three cuts by year-end. Consequently, 2- and 10-year Treasury yields reached December levels. The S&P 500 ended a five-week winning streak, with the Dow and Nasdaq also declining, while the Russell 2000 Index recorded its second consecutive weekly gain despite Friday’s dip.  In contrast, shares in the Euro area closed higher, with the Stoxx 50 index reaching a 23-year high at 4,764 boosted by gains in tech and industrial sectors. 

Summary for 19.02.2024 

• Most Asian markets traded within a tight range on Monday, mirroring weakness on Wall Street amid concerns of prolonged US interest rate hikes driven by higher-than-expected inflation. Chinese markets opened higher but saw limited gains, while Hong Kong’s Hang Seng index fell after strong gains on Friday. Other markets remained relatively flat. 
• European shares are poised to dip slightly following a near-record close last week, while US markets are closed for Presidents’ Day. 
• Oil prices declined due to worries over inflation and higher interest rates limiting fuel consumption growth, following reports of increased producer prices in the US. Brent crude futures and WTI crude dropped, with uncertainty over Chinese demand and Federal Reserve policy adding to market caution. Geopolitical tensions in the Middle East and concerns about disruptions provided some balance. 
• US producer prices for final demand surged by 0.3% in January, led by a notable increase in services, notably in hospital outpatient care, while goods prices declined, primarily due to lower fuel costs. Year-on-year, producer prices rose by 0.9%, slightly below December but surpassing expectations, indicating persistent inflation pressures, which may delay anticipated Fed rate cuts until June. 
• Mega-cap tech shares have dominated market gains in 2023 and into this year. However, recent indicators suggest broader market participation, with small-cap stocks and sectors like energy, materials, and financials outperforming. The rise in growth-sensitive industrials indicates a potential rotation towards cyclical and value-style investments, especially if the Fed cuts rates due to improved inflation rather than slowing growth. 
• The European Union is expected to fine Apple approximately €500 million for allegedly stifling competition by preventing rival music-streaming services like Spotify from informing users about cheaper alternatives outside of its App Store. This marks Apple’s first-ever penalty from the EU for violating competition rules. 
• JetBlue Airways has agreed to appoint two members from Carl Icahn’s firm to its board, averting a proxy fight. Icahn, known for targeting undervalued companies, disclosed a 10% stake in JetBlue, prompting constructive engagement. The airline, grappling with financial challenges, seeks profitability amid blocked acquisitions and uncertain travel demand. 
• Paramount Global reportedly discussed a potential streaming collaboration with Comcast to merge Paramount+ and Peacock, aiming for cost savings and improved consumer offerings. The talks are part of Paramount’s strategic review amid industry challenges. Options include a commercial partnership or joint venture, according to The Wall Street Journal. 
• German airline Lufthansa’s ground staff, represented by Verdi union, plans a strike from Tuesday to Wednesday affecting major airports including Frankfurt and Munich. The demand for a 12.5% wage increase or €500 monthly plus a €3,000 one-off payment remains a sticking point, despite Lufthansa’s “far-reaching” offer rejection. 
• German defence firm Rheinmetall intends to establish an ammunition factory in Ukraine through a joint venture with an unnamed local partner, aiming to address the country’s acute ammunition shortages exacerbated by Russia’s 2022 invasion. The factory will produce 155mm calibre bullets, with Rheinmetall holding a 51% stake in the venture. 
• China’s COMAC showcased its C919 passenger jet at the Singapore Airshow, marking its first international appearance. The company aims to challenge Airbus and Boeing’s dominance in the global market. Despite certification limitations and supply chain reliance, industry experts see potential for the C919 amid supply shortages and demand for alternatives. 
• Volkswagen reported a 13.3% increase in group deliveries in January, driven by a significant surge of 43% in sales in China. Conversely, the “Asia-Pacific Rest” region experienced a decline of 16.3%, while Central and Eastern Europe saw a sales rise of 8.2%. The growth in China was attributed to a low base from COVID restrictions last year and the timing of the Chinese New Year holiday season. 

• Loop Capital initiated coverage on Nvidia with a Buy rating and a Street-high price target of $1,200, citing increased demand for GPU computing and generative AI, especially in hyperscale computing. Meanwhile, Wedbush and Oppenheimer both raised their price targets, to $800 and $850, respectively, with Outperform ratings, anticipating strong performance driven by data centre investments, new accelerator launches, and robust AI infrastructure spending. 
• Citi reaffirmed its Buy rating on Apple with a $225.00 price target following reports of the company’s plans to introduce an AI tool for iOS developers. This move aligns with Apple’s strategy to enhance developer resources and compete with industry leaders in AI innovation. 
• Wells Fargo initiated coverage of Super Micro Computer with an Equal Weight rating and a $960 price target, citing continued AI momentum but suggesting the equity already prices in significant upside. Despite recognising the company’s AI-driven growth, analysts believe current share prices may have already factored in potential earnings expansion. 
• Oppenheimer downgraded Nike from Outperform to Perform, lowering the price target from $150 to $110. Concerns over short-term revenue prospects due to consumer demand fluctuations, product innovation slowdown, and competitive pressures prompted the revision. While recognising Nike’s long-term potential, immediate sales growth may not meet expectations, impacting its premium valuation. 
• Daiwa Securities upgraded Arm Holdings’ price target to $130.00, up from $63.00, while shifting its rating from “Buy” to “Neutral.” The adjustment follows a significant share price increase of over 60%, prompting a more conservative outlook despite the company’s robust performance and strategic positioning. 

• CFRA analysts upgraded Coinbase to Buy with a $177 price target, citing a recent earnings beat and cryptocurrency price surge. Keefe, Bruyette & Woods raised it to Market Perform at $160, noting robust revenue from retail engagement and crypto prices. Both foresee positive momentum amid regulatory challenges and market trends. 
• Raymond James downgraded Carvana Co. from Market Perform to Underperform, citing valuation concerns despite stable industry trends. The assessment focuses on the shares’ recent near-52-week high performance and anticipation of interest rate cuts, indicating a cautious outlook pending concrete signs of sustained growth and profitability. 
• Goldman Sachs anticipates continued uptrends in US equities driven by robust corporate earnings growth, setting a year-end target of 5200 points for the S&P 500 index, representing a 3.9% increase from Friday’s close. The bank cites stronger economic growth and higher profits in the IT and communication services sectors as key factors. 
• In the week ahead investors will focus on the FOMC minutes for hints on Fed rate cuts, alongside the flash S&P Global US PMIs for economic performance. Elsewhere, attention shifts to flash PMIs for the Eurozone, Germany, France, UK, Japan, and India. Additionally, Germany’s Ifo Business Climate, Turkey’s interest rate decision, and Canada’s inflation rate will be monitored.