Optimism for early Fed cuts fade following US CPI report

Equities closed sharply lower on Tuesday as US consumer price index (CPI) inflation data for January exceeded expectations, with headline inflation at 3.1% year-over-year. Treasury bond yields surged, with the 10-year yield reaching around 4.31%, impacting share indexes, down over 1%. The Nasdaq fell 1.8%, while the VIX volatility index rose about 18% to approximately 16.5.  In Europe, the Stoxx 50 index plummeted over 1%, with technology shares experiencing their largest drop in 14 months, as investors reacted to the US inflation report, while other economic indicators, including British wage growth and German investor morale, also influenced market sentiment. 

Summary for 13.02.2024 

• Most Asian shares fell on Wednesday following Wall Street’s decline after higher-than-expected US inflation data raised concerns about prolonged higher interest rates. Japan’s Nikkei 225 dropped 0.8%, driven by profit-taking, while tech-heavy indices saw steep declines. The dovish BOJ stance limited losses, with SoftBank Group and Australian banking stocks among the decliners. 
• European shares are poised for further declines, mirroring Asian and US equities, amid concerns over hotter-than-expected US CPI data, while US equity futures are seen stable after Tuesday’s sharp drop. 
• Oil prices in Asian trade dipped due to a notable increase in US crude inventories and concerns about lingering inflation affecting expectations for early Fed rate cuts. Geopolitical tensions in the Middle East and Russia tempered steeper declines, while tight US fuel supplies persisted amid ongoing refinery maintenance. 
• US inflation eased slightly in January, with the year-on-year rate dropping to 3.1% from December’s 3.4%, though still above the anticipated 2.9%. Core inflation remained steady at 3.9%, exceeding expectations. Month-over-month, consumer prices increased by 0.3%, while the core monthly rate rose to 0.4%. Consequently, market expectations of a Fed rate cut dwindled, with a diminished 34% chance of a cut in May and revised forecasts of three to four cuts in 2024, starting around June. 
• German investor morale improved more than expected in February, with ZEW reporting a rise in economic sentiment index to 19.9 points. Expectations of interest rate cuts boosted confidence, despite a dire assessment of the current economic situation. Analysts are divided on whether the dip indicates an impending recession. 
• Coca-Cola exceeded Q4 revenue estimates, driven by higher product prices and strong demand, with unit case volumes up 2% and prices rising 9%. Despite anticipating slower organic revenue growth in 2024, it expects a 6-7% increase. Operating margin improved to 21%, aided by lower input and freight costs. Net revenue reached $10.95 billion, surpassing analyst projections. 
• Shopify’s shares dropped over 13% yesterday following the release of its latest quarterly earnings report, despite earnings of $0.34 per share and a 24% increase in revenue to $2.1 billion. Subscription solutions revenue rose 31%, with monthly recurring revenue up 35%. For Q1 2024, Shopify expects revenue growth in the low twenties percentage range and a 150 basis points increase in gross margin compared to Q4 2023. 
• Biogen experienced a 7.4% drop in regular trading on Tuesday after missing Q4 estimates. Despite CEO Viehbacher’s cost-cutting measures and focus on newer drugs like Leqembi, sales are projected to remain flat in 2024. Q4 saw a profit miss due to returning Aduhelm rights and weak demand for Tecfidera and Spinraza. 
• Bank of America reported a Q4 net income drop to $3.1 billion from $7.1 billion, impacted by $3.7 billion in one-off charges. Despite a nearly 3% decline in its share price, adjusted EPS reached 70 cents, slightly exceeding expectations. The bank anticipates a net interest income recovery later in the year, supported by strong loan growth, but faces increased consumer loan defaults. Positive trends were seen in trading operations, with equities trading revenue up 12%, contributing to a 1% increase in overall trading revenue. Investment banking fees also grew by 7%. 
• Airbnb forecasts Q1 revenue above Wall Street estimates, expecting a boost from strong cross-border travel and longer-duration bookings. Despite a 5% drop in extended trading after initially rising 9% post-earnings beat, the company anticipates growth driven by investments in under-penetrated expansion countries. However, it posted a quarterly net loss of $349 million due to outstanding income tax obligations in Italy, totalling $621 million for the 2017 to 2021 tax years. 
• Lyft beat quarterly profit estimates and anticipated positive free cash flow in 2024, but faced volatility due to a significant error. Initially, it stated a key margin metric would rise by 500 basis points, later corrected to an increase of 50 basis points. CEO David Risher’s cost-cutting and partnerships drive optimism, alongside Lyft’s resilient market share against Uber. Share rallied by over 15% in afterhours trading having initially jump by over 65%. 
• Robinhood Markets surprised investors with a fourth-quarter profit, driven by increased interest income and trading activity, leading to a 10% surge in shares after the bell. The company exceeded expectations with a profit of 3 cents per share and reported strong growth in net interest revenue and transaction-based revenues. 
• TUI Group reported better-than-expected FQ1 earnings, with underlying EBIT reaching €6 million, a significant improvement from the forecasted loss, and revenue climbing 15% YoY to €4.30 billion. TUI remains optimistic, maintaining its forecast for revenue and EBIT growth while considering delisting from the London Stock Exchange. 
• Jefferies upgraded Eli Lilly’s rating to Buy and raised the price target to $853 due to optimism about orfoscerinib’s manageable drug-drug interaction profile and liver toxicity, supported by completed studies. They forecast peak sales at $14 billion, reflecting confidence in its market potential and de-risking factors. 
• UBS raised Nvidia’s price target to $850 from $580, maintaining a Buy rating, citing continued price hikes reported by customers. The firm anticipates strong demand for AI compute capacity, expecting NVDA to surpass expectations in data centre revenue. Despite supply chain constraints, UBS predicts revenue guidance of $25-26 billion for NVDA. 
• Citi upgraded GlaxoSmithKline from Neutral to Buy, raising the price target to GBP21.00. This decision follows positive DREAMM-7 trial results for belantamab mafodotin and favorable outlooks on various fronts including Zantac liabilities, vaccines, smart business strategies, and ViiV Healthcare. Their forecasts anticipate strong revenue and operating profit growth. 
• Barclays reaffirmed L’Oreal SA’s Overweight rating with a €467.00 price target after an 8% share decline, citing it as a buying opportunity. The analysis suggests the equity is reasonably priced at 30 times estimated 2025 EPS, with anticipated organic sales and EPS growth supporting a potential 12% annual TSR. 
• Piper Sandler reaffirmed Qualcomm’s Overweight rating with a $165 price target, addressing concerns about its modem shipments and market share with Apple. Qualcomm secures a three-year agreement with Apple, ensuring exclusive modem supply for iPhone 15 and a substantial share in subsequent models, enhancing its market position. 
• Bernstein maintains an Outperform rating on Block Inc. with a $85.00 price target. Despite increased EBITDA projections, concerns linger over gross profit growth deceleration and challenges in Square seller business and Cash App’s monetization. The firm sees avenues for growth but monitors profitability expansion and internal issues closely. 
• Jefferies raised Lululemon Athletica Inc.’s price target to $300 from $250 but maintained an Underperform rating, citing concerns about high expectations for the men’s product line and potential issues emerging from recent survey results and market data. Despite acknowledging the brand’s strength, they express caution about future performance. 
• Bernstein maintained a Market Perform rating on Apple Inc. with a $195.00 price target, emphasising the company’s strategic shift towards services, contributing to improved margins and stock re-rating. Recent price hikes in services are estimated to boost revenue growth and profits, but overall service growth is expected to slow. 
• Jefferies raised its price target for Palo Alto Networks to $450 from $350, maintaining a Buy rating. Anticipating strong Q2 growth in annual recurring revenue (ARR) and billings, the firm notes positive cybersecurity reports and views Palo Alto Networks as well-positioned for industry consolidation, justifying its premium valuation. 
• Daiwa Securities downgraded PayPal from Outperform to Neutral, adjusting the price target to $62 from $64 due to revised EPS estimates. Concerns over conservative guidance for fiscal 2024 and challenges in predicting medium to long-term EPS growth led to the shift. They await clearer signs of growth before reconsidering their stance. 
• RBC Capital initiates coverage on Enphase Energy with an Outperform rating and a $140 price target, citing the company’s dominant market share and innovative technology in residential solar inverters. Analysts believe Enphase’s patented tech and installer network create a strong competitive advantage, anticipating growth opportunities in expanding markets. 
• Redburn Atlantic downgraded United Airlines to Neutral and European carriers Air France, International Consolidated Airlines Group, and Wizz Air to Neutral or Sell, favouring European low-cost airlines due to robust demand for air travel but cautioning against US domestic supply growth and pricing challenges in 2024. 
• Amazon founder Jeff Bezos continues selling shares, with recent filings revealing over $2 billion worth of equities sold in two weeks, reducing his stake to 964 million shares, despite his position as the company’s top shareholder. He hasn’t explained why he’s selling now, but a more banal explanation could be he’s hoping to save on taxes. 
• Standard Chartered is considering a breakup of its institutional banking operation, which includes dealmakers and traders, from corporate and commercial banking, people familiar said. The move is one possibility CEO Bill Winters is weighing to improve returns and may lead to job cuts. Shares in Hong Kong fell this morning. 
• Germany plans to sell up to 30% of its stake in Uniper, acquired during the energy crisis, to recoup bailout costs. Amid stable energy markets, the government aims to reduce its ownership to 70%-80% through an equity market sale, potentially involving strategic investors. Uniper seeks to retain Berlin as a long-term anchor shareholder for stability and credit rating purposes. 
• JPMorgan analysts suggest a trading theme favouring the US over Europe due to divergent growth trends. They recommend overweights in US equities, credit, and Bunds, and a preference for the dollar over the Euro. They caution against equities trading at all-time highs due to various market risks, advising a tactical pause.