Category: zerohedge

By Michael Every of Rabobank

We are all focused on US inflation numbers today. So focused, in fact, that some of us think we know what the number already is, at least compared to the consensus of 0.4% m/m, 7.2% y/y. There was a strong response to the US 10-year auction yesterday, with indirect bidders (i.e., nudge-nudge-wink-wink foreign central banks) stepping up, which does not suggest much fear of an upside surprise pushing the US 10-year yield through the psychological 2% level. There is also market chatter of whispers that today will see a CPI downside surprise –so only 7.1% y/y? Such non-inflationaryness!!– for the first time in a while.

I get this is important. Another upside surprise and the odds of the Fed going 50bp in March would increase. A downside surprise and ‘inflation is over!’ memes will build, helped by ‘Too Big to Sail’ supply-chain logjams easing slightly at LA/LB port. (To be expected at this time of year by the way: and ready to change for the worst due to any number of trigger points).

But really, given all the statistical deep-tissue massaging going on –akin to the neck-cracking Thailand’s Wat Po school used to do before it was dropped for health and safety reasons– does anyone think inflation would actually be ‘over’ on the back of a one-tick downside surprise today? Of course, base effects alone say the y/y inflation headline rate will ease ahead. Yet in energy and in food in particular, ‘what goes up does not have to come down’, and 7% headline inflation can still be followed by 3% and still not mark any kind of win for central banks or consumers.

The key issue is if a workforce already either moving into crypto and out of their jobs, into retirement, onto the streets, or into trucks, is going to swallow a double-digit drop in real incomes or will push for much higher nominal wage growth. No wage growth suggests a nasty outcome, as you cannot spend what you don’t have. Wage growth suggests an echo of the ‘70’s. So the 2022 (and 2023) inflation story is far from over whatever happens today.

At the same time, the same people who focus intently on the minutiae of a 0.34% or a 0.35% reading in US inflation are not even glancing on the start of Russian military exercises next to Ukraine that could indicate an invasion according to the US sources markets are supposed to listen to. That is despite the fact that any invasion would force changes to everybody’s inflation forecasts. The logic of concentrating on the odds of a 0.01% difference in the m/m change in the CPI index as opposed to the bright-pink-rhino tail risk of 130,000 men, tanks, ships, planes, artillery and missiles, etc., eludes me. But you do you, Wall Street.

Ominously, Russia has already declared most of Ukraine’s Black Sea and Sea of Azov coastlines closed for missile drills from February 13-19. That map is an overlay with the one showing where fighting in Ukraine could hit the global grains trade, even though winter is not a worrying time for this to be happening. Moreover, there are other things to note with concern.

• First, Putin’s luxury superyacht, ‘Graceful’, just hurriedly left Germany before finishing repairs, according to local media. It did not require any historic bridges to be demolished to do so.

• Second, Ukraine almost certainly won’t accept the Minsk accords Russia and France want it to, even if backed by the EU, even if that were to be the united EU position. Experts say if Ukraine were forced to do so, the country would be thrown into chaos and likely splinter – again bringing Russia into the picture.

• Third, Russia has so far achieved nothing much beyond demonstrating the West is not united and the EU not capable of serious action (e.g., recent military flights taking cargo to Ukraine show 13-14 each from the UK and US vs. 1 from the EU). Will Russian troops just go home when military exercises officially end on 20 February, leaving Ukraine and NATO to rearm over the next few years? Russian military equipment could be stockpiled next to Ukraine (and stay in Belarus), meaning hostilities could restart quickly.

• Fourth, the Russian press make clear this issue is not going to go away. Ruslan Pushkov, a military analyst in Moscow, states even if Western concessions stall conflict for now, they will not hold longer term as “The West just doesn’t understand how much this is a question of life and death for us.” The Dean of the school of international relations at an elite Moscow university likewise argues, “I expect we’ll have this crisis with us, in various forms, for all of 2022, at least.” He sees it as just the start of a drawn-out, high-stakes phase of a Russian effort to change the European security architecture to a new form the West rejects. The aim, he believes, is to keep the threat of war ever-present, in order to harass war-averse Western leaders to negotiate. Yet continually threatening war and not acting could eventually see the West shrug – ironically, just like the market analysts who have a 0.01% difference in the m/m change in the US CPI index to worry about. What would Russia do then if it really is ‘a question of life and death’?

The key point is that we have significant room for market-moving upside or downside surprises today: and regardless of the US CPI print, the further out you look, the more that dynamic holds true.

(I would also like to apologise to the majority of readers who, even with translate functions, didn’t get the Russian punchlines yesterday. Both phrases were polite Soviet equivalents of very impolite US military acronyms to describe very bad situations that are not easily resolved.)

We warned days ago that if the Ambassador Bridge that connects Windsor, Ontario, with Detroit, were to remain closed until the end of the week, there would be severe consequences for North America’s auto industry. 

As of Thursday morning, automakers including Toyota, Chrysler Pacifica, Ford, and General Motors halted or limited production at their Canada/U.S. manufacturing plants due to Canadian truckers blocking the busiest international land border crossing between the U.S. and Canada over vaccine mandates. 

Ford told AP that it suspended engine production in Windsor while its factory outside Toronto had reduced production.  

“We hope this situation is resolved quickly because it could have a widespread impact on all automakers in the U.S. and Canada,” the company said.

Chrysler-maker Stellantis is facing an urgent parts shortage at its assembly plant in Windsor, where it had to cut shifts on Tuesday but resumed some production yesterday, 

Due to part shortages, General Motors reduced output at its Lansing, Michigan, making SUVs for Buick, Chevrolet, and GMC brands. 

Toyota expects to have three manufacturing facilities in Ontario offline for the rest of the week due to part disruptions. The company told Newsweek via email: 

“Due to a number of supply chain, severe weather, and COVID-related challenges, Toyota continues to face shortages affecting production at our North American plants, including Toyota Motor Manufacturing Canada,” the company said in its statement. “Our teams are working diligently to minimize the impact on production. While the situation is fluid and changes frequently, we do not anticipate any impact to employment at this time.”

 

Taking a look at Ambassador Bridge’s live cam into the U.S. (around 0840 ET) shows no truck and car inbound traffic. 

Ambassador Bridge’s live cam in Canada is the same. 

The blockade is so concerning that the Bank of Canada’s Governor Tiff Macklem warned Wednesday afternoon that the entire situation is very distressing and could impact the economy.

As Katabella Roberts writes at The Epoch Times, politicians are furious at the growing ‘minority’ daring to challenge their dominion.

White House spokesperson Jen Psaki also urged protesters to “understand what the impact of this blockage is” and the potential impact it could have on the supply chain.

“We’re also looking to track potential disruptions to U.S. agricultural exports from Michigan into Canada,” Psaki said in a press briefing.

Meanwhile, Trudeau decried the demonstrations this week, insisting that while “Canadians have the right to protest, to disagree with their government, and to make their voices heard,” what they do not have is the right “to blockade our economy, or our democracy, or our fellow citizens’ daily lives.”

“It has to stop,” Trudeau said.

For their part, Organizers of the Freedom Convoy 2022 maintain that Canada’s COVID-19 mandates and restrictions, which have been far stricter than those in the United States, are “destroying the foundation of our businesses, industries, and livelihoods.”

The vaccine mandate could see 10 to 15 percent, or about 12,000 to 16,000 of truck drivers off the road, estimated the Canadian Trucking Alliance (CTA), which said it does not support and strongly disapproves of the demonstration.

“Small businesses are being destroyed, homes are being destroyed, and people are being mistreated and denied fundamental necessities to survive. It’s our duty as Canadians to put an end to this mandate,” organizers say.

A recent survey by the Angus Reid Institute found that a majority of Canadians, 54 percent, are in favor of lifting restrictions in the country.

Expectations for this morning’s must-watch CPI were a continued non-transitory acceleration to +7.3% YoY (Core +5.9% YoY), but they underestimated as the headline printed a shocking +7.5% YoY – the highest since March 1982.

Source: Bloomberg

This is the 20th straight monthly rise in CPI, with both goods and services costs rising…

Source: Bloomberg

Below the headline print, core consumer prices rose 6.0% YoY (hotter than the 5.9% expected and highest since Aug 1982) as food, energy, and used car prices were the biggest drivers. The energy index rose 27.0% over the last year, and the food index increased 7.0%.

Source: Bloomberg

The food index increased 0.9 percent in January. The food at home index increased 1.0 percent over the month after rising 0.4 percent in December. Five of the six major grocery store food group indexes increased in January. The index for cereals and bakery products increased the most, rising 1.8 percent over the month. The index for other food at home increased 1.6 percent in January, while the index for dairy and related products rose 1.1 percent. The fruits and vegetables index rose 0.9 percent over the month, and the meats, poultry, fish, and eggs index increased 0.3 percent. The only grocery store group index not to increase in January was the index for nonalcoholic beverages, which was unchanged.

The energy index increased 0.9 percent in January. The electricity index rose sharply in January, increasing 4.2 percent. The gasoline index fell 0.8 percent in January after rising rapidly in the autumn of 2021. (Before seasonal adjustment, gasoline prices rose 0.1 percent in January.) The index for natural  gas also declined in January, falling 0.5 percent after declining 0.3 percent in December.

Finally, we note that CPI-PPI – a proxy for margin compression – remains at extreme levels (and just this morning Unilever showed)

Source: Bloomberg

So, will this print pushed the market up from 30% to 55% odds of a 50bps rate-hike in March.

Submitted by Newsquawk

• US consumer prices are expected to rise by +0.5% M/M in January, boosting the annual rate by 0 3ppts to 7.3% Y/Y. which would be the highest annual rate since the early 1980s.
• The core measure of inflation is seen rising 0.5% M/M too. with the annual rate seen rising by 0 4ppts to 5 9% Y/Y. which would also be the highest since the early 1980s.

MARKET REACTION: From a macro perspective the inflation data may provide some insight to traders on what increment the FOMC will raise rates by at its March 16th meeting the logic is that any further inflation upside would see markets price a more aggressive course of Fed normalization (potentially a 50bps March rate hike), while a softer report could signal the Fed will hike by a 25bps increment in March. If the data is in line with expectations, some remind us of the potential for a sell the-fact market reaction as was seen in January after the release of the December CPI metrics which saw the Dollar Index slump to 9-week lows despite price pressures rising

FED REACTION: Many officials have recently played down the prospects of a 50bps move, although they have generally caveated their views based on incoming data. In wake of the release Fedspeak will be gauged to judge how officials views have evolved any alarm about sharper price pressures would likely see bets of a 50bps move raised by market participants, and conversely a sanguine outlook after the data, and reaffirmations of views that inflation will come down in the months ahead would likely see more support for a smaller 25bps move in March

STRATEGIST VIEW: JPMorgan’s strategists said CPI data was getting more hype than any economic data in recent memory Its US Head of Cash Trading said “although I am still not intermediate or long term bullish on markets (in a nutshell. I still think if growth holds up. Fed will keep hiking good news will be met with a more hawkish Fed and bad news is well bad news), it does feel to me like the risk/reward is skewed to the upside for CPI” adding that the recent Fed meeting made clear that incoming inflation data is the only variable that matters for the Fed.’

THE DATA ITSELF: Many analysts have noted that base effects will likely weigh on headline inflation in the months ahead, but some note that these will still contribute to upside in the January data. Credit Suisse explains that goods inflation is likely to remain strong in January, and used vehicle prices should continue to rise following three months of gains. The bank also cites its own industry sources who suggested that prices were strong in the early part of the month and although prices for services could ease due to the impact of Omicron. CS argues that increases in wage growth and strong shelter inflation should support a high reading in services CPI.

AHEAD: Credit Suisse says that along with a pickup in shelter inflation, faster wage growth will help support inflation well above 2.0% going forward even as the temporary shocks to goods prices fade ” Credit Suisse writes “this should support the Feds decision to begin a hiking cycle in March followed by balance sheet reduction in the summer.”

Ahead of the closely-watched CPI print, Nomura’s Charlie McElligott notes that, from an options dealer positioning perspective, the S&P looks “insulated and stable” with ‘long gamma, zero delta’, but Nasdaq and Small Caps are both ‘long gamma, short delta’ meaning there is potential “fuel to melt-up” from covering delta.

SPX Neutral Gamma “flip” @ 4496, Neutral Delta @ 4577

QQQ Neutral Gamma @ $361.66, Neutral Delta @ $371.95

IWM Neutral Gamma @ $203.26, Neutral Delta @ $211.54

McElligott warns that the greatest risk to consensus positioning & thus, performance is to a CPI disappointment (meaning: surprise LOWER in today’s number) for obviously crowded “hawkish” Bond shorts and underpositioned Equities investors, both susceptible to a large “squeeze” higher on a “dovish” market response.

That means watching CTA positioning is also critical as the “Short Bonds and MM Rates” remains fully-loaded (and generally far from “covers” because it is so deeply in-trend) alongside “Long Commods,” vs a much more nuanced Stocks story, which is a “Net Short Global Equities – but proximate to ‘buy to cover’ triggers” dynamic.

Here are the levels…

In a longer term (i.e. multi day) context, SpotGamma notes that as long as the S&P holds our Vol Trigger level (4520), we give edge to markets pushing higher.

Our base assumption for today is that the “event volatility” around the CPI number burns off, which kicks in positive vanna flows and gamma hedging into the 4600 area. This would signal a continued rotation in options positions to higher strikes which drags markets up.

For the downside, based on today’s volatility estimate it would likely take multiple sessions to initiate a major selloff from here – we’d first have to stage today down near the 4500 line (~1% lower) which would position the market for a more significant decline tomorrow. In other words: due to the gamma position we see less downside tail risk for today.

Joe Rogan won’t be taking his immensely popular (if controversial) podcast to Rumble, the conservative-leaning video-streaming service, whose CEO just offered him $100 million to make the switch from Spotify.

Rogan made the remarks in the form of a joke during a surprise stand-up set in Austin, Texas, his adopted home, on Tuesday. Rogan performed his set then stuck around for a Q&A session with the audience afterward.

When asked about moving to Rumble, Rogan said “no”, before elaborating.

“Spotify has hung in with me, inexplicably,” Rogan added. “Let’s see what happens.”

Rogan’s comments come one day after Rumble CEO Chris Pavlovski offered Rogan “100 million reasons” to switch over to his platform. z

Spotify paid Rogan north of $100 million in 2020 to take his podcast – the most popular podcast in the US – exclusively to Spotify. But it’s important to remember that Rogan has been hosting his show for longer than Spotify has existed as a company. It’s also worth noting that Spotify sees Rogan’s show as a critical revenue-driving asset, unlike the music of Neil Young, which only drains the company’s coffers.

Since last Friday, Spotify has pulled more than 70 episodes of Rogan’s program from its app, bringing the total number of episodes removed to 113. CEO Daniel Ek claimed in an internal memo that the episodes were removed with Rogan’s consent.

Rogan has been facing an evolving controversy over the past few weeks that first focused on his role in spreading “COVID misinformation”, before metastasizing to focus on Rogan’s “language on race,” as Grammy-winning soul musician India Arie put it. A viral video of Rogan saying “the n-word” elicited another frank apology from Rogan, who said he has changed his views on saying the word, and that he hasn’t uttered it at all in “years”.

During his set, Rogan joked about the hypocrisy of iPhone users being angry with him for using ‘the n-word’, given the conditions under which the iPhone is made.

“I haven’t used that word in years… but it’s kind of weird people will get really mad if you use that word and tweet about it on a phone that’s made by slaves.”

He also mocked the notion that people take health advice from him and his show.

“I talk shit for a living — that’s why this is so baffling to me,” he said. “If you’re taking vaccine advice from me, is that really my fault? What dumb shit were you about to do when my stupid idea sounded better? ‘You know that dude who made people eat animal dicks on TV? How does he feel about medicine?’ If you want my advice, don’t take my advice.”

Rogan has released several standup specials on Netflix, with his latest “Rocky Mountain High” having just premiered this week in the midst of all this controversy. We can’t help but wonder if this controversy was manufactured to drive viewership on Netflix?

US index futures are unchanged from Wednesday’s close after some rangebound trades in another illiquid, overnight session, as traders were paralyzed and unwilling to commit capital ahead of today’s critical CPI print which consensus expects to come in at 7.2% YoY headline and 5.9% core, but which may well surprise to the downside (we explained why yesterday) after beating expectations on 8 of the past 10 occasions. A miss will likely send yields lower and risk sharply higher, especially when considering that the BLS will revise its CPI basket weightings and seasonal adjustments today. On the other hand, an upside surprise could spur additional pricing for a 50bp rate hike at the March meeting, currently priced in the swaps market at around 28%, and as such the 830am CPI print will shape views on how aggressively the Federal Reserve will tighten monetary policy in coming weeks.

Contracts on the S&P 500 were flat, and the Nasdaq drifted lower after a broad Wall Street rally on Tuesday, US Treasury yields were lower as was the dollar while bond yields in most of Europe ticked higher, as did bitcoin which briefly rose above $45,000 .

“This inflation data will provide investors with more clues on how aggressive the Fed could be at its next policy meeting, sparking volatility in both bond and stock markets,” said Pierre Veyret, a technical analyst at ActivTrades.

Markets are pricing in more than five quarter-point Fed hikes in 2022. Some remain skeptical about such bets, such as Bokeh Capital Partners Chief Investment Officer Kim Forrest, who said on Bloomberg Television that she sees expects inflation to ease as government handout programs are removed.

Five to seven Fed hikes “is just so crazy — it’s a lot driven by bond people here who really just want to get that 10-year to the 3% rate and I don’t know that’s possible,” said Forrest, who expects maybe two Fed rate increases in 2022.

Walt Disney jumped in premarket trading after beating estimates, with positive surprises from streaming service subscriptions and theme parks. Twitter rose in premarket trading after announcing a $4 billion share buyback to offset earnings and projections that disappointed expectations. Coca-Cola and Pepsico also climbed on robust earnings. Here are some other notable premarket movers:

• Uber (UBER US) rises 5% in premarket trading after it reported fourth- quarter revenue that beat the average analyst estimate. Analysts say pandemic-linked headwinds may ease for the ride-hailing company.
• Mattel (MAT US) jumps 11% in premarket trading. The toy manufacturer reported an “impressive” beat in 4Q, according to Truist Securities.
• Twilio (TWLO US) shares jump 19% in U.S. premarket trading, after the infrastructure software company reported fourth-quarter results that beat expectations and forecast first-quarter revenue ahead of the analyst consensus. Analysts were particularly positive on the firm’s improved growth prospects.
• Shares of MGM Resorts (MGM US) rose 3% in post- market trading, after the entertainment company reported adjusted earnings per share for the fourth quarter above the average analyst estimate.
• Emcore (EMKR US) tumbles 16% in postmarket trading after the aerospace and communications supplier’s fiscal second-quarter revenue outlook missed the average analyst estimate.
• O’Reilly Automotive (ORLY US) shares rallied 9% in postmarket trading after the car-parts retailer’s 2022 profit forecast beat the average analyst estimate.
• Vimeo (VMEO US) slumped 21% in postmarket trading after the software company forecast full-year revenue growth below the average analyst estimate and said its chief financial officer is departing.
• Lumen Technologies (LUMN US) shares plunged over 11% in postmarket trading after the company’s 2022 adjusted Ebitda forecast missed the average analyst estimate.
• Impinj (PI US) forecast revenue for the first quarter that exceeded the average analyst estimate at the midpoint. The stock tumbled in postmarket trading after rallying more than 19% in the past four trading sessions.

While robust corporate earnings provided support for stocks this week, the U.S. inflation print is the center of attention on Thursday. Data are expected to show U.S. inflation exceeding 7%. A surprise reading either side could shift bets on the pace of Fed interest-rate hikes and inject more volatility into stocks and bonds.

“The market is being somewhat sanguine about what will happen in the second half of 2022,” Sonal Desai, chief investment officer at Franklin Templeton Fixed Income, wrote in a note. “There is an expectation that inflation will decline sharply. I think that might be optimistic because a lot of the factors driving inflation will still be with us. The Fed is already behind the curve.”

Fed Bank of Cleveland President Loretta Mester and her Atlanta counterpart Raphael Bostic said all options are on the table for the size of policy makers’ first interest-rate increase in March, but Mester doesn’t see a “compelling case” for a 50-basis-point hike. They indicated they prefer the Fed to start reducing its balance sheet soon.

In Europe, the Stoxx Europe 600 Index erased earlier gains to drop 0.1%, dragged by consumer goods and personal care sectors after a slew of earnings reports. Personal-care heavyweight Unilever Plc dropped after sounding the alarm on cost increases, and L’Oreal SA declined even after reporting record sales, with traders focusing on eroding margins; Delivery Hero slumped after providing a disappointing guidance. Travel, real estate and health care outperformed. Siemens and AstraZeneca were lifted by stronger-than-expected earnings. Here are some of the biggest European movers today:

• Siemens shares jump as much as 8% after the company reported first-quarter earnings that analysts said beat estimates “across the board.” The gain is the steepest since November 2020.
• Societe Generale shares climb as much as 4.2%, to the highest since Oct. 2018, after the lender reported 4Q results that Jefferies says are “very strong,” with net profit 40% above consensus.
• Huhtamaki shares rise the most since July 2020, after the Finnish maker of food packaging reported adjusted Ebit for the fourth quarter that beat the average analyst estimate.
• AstraZeneca rises on 4Q earnings which beat analyst expectations on core EPS and product sales. Handelsbanken calls the outlook a “relief although broadly in line.”
• H&M rises after Deutsche Bank upgraded the company to hold, saying the Swedish fashion retailer has an attractive valuation on about “5.5% dividend yield that is growing.”
• Delivery Hero shares lose a quarter of their value in a record one-day loss following a quarterly update, with analysts saying that the online food delivery firm’s Ebitda guidance for 2022 is disappointing.
• Credit Suisse shares fall as much as 5.1% after the lender rounded off a challenging 2021 with a fourth- quarter net loss of CHF2 billion, with analysts calling the quarter “messy.”

Earlier in the session, Asian equities rose for a second straight day ahead of key U.S. inflation data due later that may provide clues on the Federal Reserve’s tightening pace. The MSCI Asia Pacific Index advanced as much as 0.7%, helped by technology and material stocks. Shares in Japan, Hong Kong and Taiwan rose on Thursday while mainland China’s CSI 300 declined. Global stocks have had a broadly positive week as the 10-year U.S. Treasury yield’s slip from multi-year highs helped boost demand for growth stocks. Still, the prospect of hotter-than-expected U.S. inflation spurring a big Fed rate hike has kept investors on edge.  “Inflationary pressure will probably stay for a while –the takeaways from the current earnings season mean it is not going away for the next quarter or so,” Christina Woon, investment manager at Abrdn Asian Equities, said in an interview on Bloomberg TV. “So investors need to watch out for margins.” The Reserve Bank of India stuck to its dovish tone to ensure an economic recovery in a surprise move, while Indonesia’s central bank kept borrowing costs unchanged to maximize support for the economy

Japanese equities rose, capping a third day of gains and a second-straight weekly advance amid an extended rebound from the rate-driven selloff. Electronics and chemical makers were the biggest boosts to the Topix, which rose 0.5%, rounding a weekly advance of 1.7%. Tokyo Electron and Advantest were the largest contributors to a 0.6% gain in the Nikkei 225. “People are waiting for U.S. CPI figures,” said Tetsuo Seshimo, a portfolio manager at Saison Asset Management Co. “But for Japan stocks, earnings will likely continue to provide support.”

Indian stocks rose as the Reserve Bank of India’s monetary policy panel kept the benchmark interest rate unchanged to extend its stance of focusing on growth despite mounting inflation. The S&P BSE Sensex gained 0.8% to 58,926.03 in Mumbai while the NSE Nifty 50 Index advanced by a similar measure. The key gauges extended their rally into a third day. All but one of the 19 sector sub-indexes compiled by BSE Ltd. climbed, led by a gauge of power companies. “It is quite reassuring for stocks that the RBI has continued with an accommodative stance and kept the inflation estimate at its current level,” said Abhay Agarwal, a fund manager at Piper Serica Advisors Pvt. He sees rate-sensitive shares to be the biggest beneficiaries of the central bank’s decision and commentary.  RBI’s priority on growth is not unwarranted given that economic recovery is yet to gather momentum while private consumption lags pre-pandemic levels, according to Naveen Kulkarni, chief investment officer at Axis Securities.  “We believe over the medium term, policy rates are likely to gradually harden, and markets will continue to gauge impact from global policy changes,” he said. Corporate earnings for the quarter through December have been mixed, with rising input costs eating into margins of manufacturing-linked companies. Automaker Mahindra and miner Hindalco Industries were the latest Nifty 50 companies to report profit that beat analysts estimates.  Of the 43 Nifty 50 companies that have reported quarterly numbers thus far, 23 either met or exceeded analyst estimates, 18 missed and two can’t be compared. Hero MotoCorp will be reporting results later Thursday.  HDFC Bank contributed the most to the Sensex’s gain, increasing 1.8%. Out of 30 shares in the Sensex index, 26 rose and 4 fell

In rates, treasuries were richer across tenors led by front-end, with long-dated yields off session lows, steepening the curve ahead of January CPI report and 30-year bond auction. Yields were richer by more than 2bp across 2-year sector, steepening 2s10s by 1.7bp; the 10-year yield traded around 1.925%, outperforming bunds and gilts by 1.5bp and 0.5bp. Italian bonds lead euro-zone bonds lower as ECB rate hike wagers increase ahead of EU and U.S. inflation numbers. January CPI data is expected to show 7.2% y/y increase; an upside surprise could spur additional pricing for a 50bp rate hike at the March meeting, currently priced in the swaps market at around 28%. Treasury auction cycle concludes with $23b 30-year new issue at 1pm ET, week’s third and final sale; demand was strong for 3- and 10-year notes

Fixed income was broadly steady with the belly of the German curve underperforming U.K. and U.S. peers. Curve moves are modest, U.S. 2s10s ~1.5bps steeper ahead of today’s inflation print. Peripheral spreads have a small widening bias with 10y Italy ~2bps wider to Germany near 156bps. JGB futures snap higher, JPY goes small offered after a BOJ special purchase operation announcement.

In FX, the Bloomberg Dollar Spot Index gave up a modest gain as the greenback slipped against risk-sensitive peers, led by the kiwi; short-end Treasury yields slipped. The euro edged up a second day to near $1.1450; yield curves bear-steepened in the region, and peripheral bonds underperformed the core. One-month implied volatility in the euro now captures the next ECB meeting and the relative premium suggests options are fairly priced. The pound led gains before a speech by BOE Governor Andrew Bailey. Sweden’s krona was the worst performer, dropping as much as 0.6%, after the Riksbank kept up its dovish monetary-policy stance as Governor Stefan Ingves blocked a push from officials for stimulus withdrawal; Swedish yields dropped by up to 7bps, led by the front end. The yen weakened while Japanese government bonds fell with the benchmark 10-year yield rising to a six-year high amid wariness over U.S. CPI data ahead of a Japanese holiday on Friday. The BOJ offered to buy an unlimited amount of bonds at a fixed rate, pushing back against traders that are testing its yield curve control policy.

In commodities, crude futures drift: WTI trades either side of $90, Brent near $91.50. Base metals trade well with most up over 1.5%, Spot gold trades a narrow range near $1,833/oz.

To the day ahead now, and the aforementioned US CPI release will be the main highlight. Other data releases include the US weekly initial jobless claims and the monthly budget statement for January. From central banks, we’ll hear from BoE Governor Bailey, ECB Vice President de Guindos, and the ECB’s Lane and Villeroy. Earnings releases include The Coca-Cola Company, PepsiCo, Philip Morris International and Twitter. Finally, the European Commission will be publishing their latest economic forecasts.

Market Snapshot

• S&P 500 futures down 0.2% to 4,569.50
• MXAP up 0.6% to 191.62
• MXAPJ up 0.7% to 630.21
• Nikkei up 0.4% to 27,696.08
• Topix up 0.5% to 1,962.61
• Hang Seng Index up 0.4% to 24,924.35
• Shanghai Composite up 0.2% to 3,485.91
• Sensex up 0.9% to 58,996.33
• Australia S&P/ASX 200 up 0.3% to 7,288.45
• Kospi up 0.1% to 2,771.93
• STOXX Europe 600 little changed at 473.35
• German 10Y yield little changed at 0.24%
• Euro up 0.1% to $1.1442
• Brent Futures up 0.6% to $92.07/bbl
• Gold spot down 0.1% to $1,831.24
• U.S. Dollar Index little changed at 95.48

Top Overnight News from Bloomberg

• The ECB will take a gradual approach to unwinding some of its ultra-expansionary monetary policy, Governing Council member Olli Rehn says in Helsinki seminar
• Euro-area inflation will ease below the ECB’s 2% target next year, according to new draft projections from the EU that will feed the growing debate about how quickly to raise interest rates
• Worries about Britain’s cost of living crisis and a shortage of workers pushed U.K. starting salaries up by their third-fastest pace on record in January, according to a survey that will add to growing concerns at the BOE about inflation and rampant wage gains
• The BOE’s quantitative easing program is on course to book a 3 billion-pound ($4.1 billion) loss in the coming weeks as the central bank’s massive bond holdings start their journey from government cash cow to a drain on the public finances
• EU and U.K. attempts to jump-start negotiations over the post-Brexit trading relationship in Northern Ireland have so far failed to make any progress, and diplomats see little chance for any substantial progress until they get past a key election scheduled for May
• Bank of Japan chief Haruhiko Kuroda says that it’s impossible for the central bank to make a hawkish turn before his term ends next year, Mainichi newspaper reported, citing an interview with the governor
• Some of this year’s worst-performing emerging markets will get another chance to lure back bond investors after their first round of aggressive rate hikes failed to contain inflation. At least seven countries including Russia, Mexico and India are set to follow Poland and Romania, which raised benchmark rates this week

A more detailed look at global markets courtesy of Newsquawk

Asian stocks traded mixed as participants digested another deluge of earnings and US-China frictions. ASX 200 (+0.3%) was supported by tech and with financials boosted after AMP and NAB reported higher H1 profits. Nikkei 225 (+0.5%) finished off highs with the index swayed by a choppy currency and numerous earnings. Hang Seng (-0.2%) and Shanghai Comp. (-0.3%) were subdued after Hong Kong reported its first COVID death in five months, while Biden administration is said to mull trade actions on China. Nifty 50 (+0.7%) was initially choppy heading into the RBI decision but was then lifted after the central bank kept the Repurchase Rate at 4.00% and unexpectedly maintained the Reverse Repo Rate at 3.35%.

Top Asian News

• BOJ Seeks to Rein in Yields With Unlimited Fixed-Rate Purchases
• BOJ to Conduct Unlimited Fixed-Rate JGB Purchases at 0.25%
• Credit Suisse Hires 80 Wealth Bankers for Asia Growth
• India’s Central Bank Chief Says Crypto Is ‘Not Even a Tulip’

European bourses are mixed/positive having pulled back modestly from a firmer cash open, individual movers heavily dictated by pre-market earnings. Sectors are mixed with Basic Resources outperforming while Consumer Products/Services are pressured on earnings dynamics.

Top European News

• Italy Is Set to Approve Start of Process to Sell Airline ITA
• U.K. Salaries Jump as Workers Grapple With Cost-of-Living Crisis
• Delivery Hero Slumps Most on Record as Outlook Disappoints
• Turkey Kicks Off Latest Round of Capital Injections in Banks

Central Banks:

• BoJ to purchase unlimited 10yr JGBs on Feb 14th at 0.25% (#363, #364 and #365); decided on fixed rate operation given recent yield moves. Will firmly keep policy to keep 10yr yields around 0%.
• Riksbank maintains its Repo Rate at 0.00% as expected. QE maintained for Q2 (SEK 37bln for Q1 2022); three hawkish dissenters on QE. Q1 2024 rate path lifted marginally; even if the risk of too low inflation has declined, it still remains. Governor Ingves says a rate hike is inching closer than we earlier believed.
• RBI kept the Repurchase Rate unchanged at 4.00% and maintained accommodative policy stance, as expected, but also surprisingly held the Reverse Repo Rate at 3.35% (exp. 20bps increase). RBI Governor Das said the MPC flagged potential downside risks to activity from Omicron and they are seeing some loss of momentum for economic activity, while the MPC was of the view that continued policy support is
• warranted for a durable and broad-based recovery.
• ECB’s Rehn says it is more preferable to progress one step at a time in normalising monetary policy in an uncertain environment; will use all tools to stabilise inflation around 2%.

In FX, DXY somewhat deflated into US CPI even though expectations are lofty, as Fed’s Mester sees no compelling case for 50bp March liftoff. Riksbank rattles SEK with only minor rate path tweak and no real tilt from transitory inflation view. BoJ undermines YEN by announcing unlimited JGB purchases to prevent 10 year yield spiking further from target. ZAR continues shine alongside Gold in the run up to SA State of Nation Address. Turkish Finance Minister is to announce “a new support package” on Feb 12th; will focus on measures to  curb recent price rises whilst providing support to export firms, plans to bring “under-the-mattress gold” into the Turkish banking system.

In fixed income, core bonds back-off after a fade below midweek highs as US CPI looms before the long bond refunding leg. JGBs buck the bearish trend as the BoJ steps in to defend its YCT via unlimited purchases of 10 year maturities from February 14th.

In commodities, WTI and Brent remain choppy in fairly tight ranges in the context of recent performance, focus very much on geopols as Russian military drills commence. White House said President Biden and Saudi King spoke about commitment to ensure stability of global energy supplies, while Energy Intel noted that Saudi’s King Salman stressed importance of maintaining balance and stability in oil markets, highlighting importance of maintaining the OPEC+ agreement. OPEC MOMR to be released at 12:45GMT/07:45EST. Spot gold trades sideways and confirmed support at USD 1,830/oz, which acted as resistance on the way up. Base metals derived support in APAC hours while Coal pulled-back given recent commentary.

US Event Calendar

• 8:30am: Jan. CPI YoY, est. 7.2%, prior 7.0%; CPI MoM, est. 0.4%, prior 0.5%, revised 0.6%
• 8:30am: Jan. CPI Ex Food and Energy YoY, est. 5.9%, prior 5.5%, CPI Ex Food and Energy MoM, est. 0.5%, prior 0.6%
• 8:30am: Jan. Real Avg Hourly Earning YoY, prior -2.4%, revised -2.0%; Real Avg Weekly Earnings YoY, prior -2.3%, revised -2.0%
• 8:30am: Feb. Initial Jobless Claims, est. 230,000, prior 238,000; Continuing Claims, est. 1.62m, prior 1.63m
• 2pm: Jan. Monthly Budget Statement, est. $23b, prior -$162.8b

DB’s Jim Reid concludes the overnight wrap

I’ll be honest, life is so dull for me at the moment that work is my salvation. 9.5 days down on crutches now and 32.5 to go. Given I only went through the same thing on my other knee in September and October last year it is fair to say I’m ready for a decent stretch of no injuries. As is my wife who has to deal with me and also our 6-year old Maisie who is going to continue to be in wheelchair for the best part of this year. For those that have kindly asked the good news is that she’s swimming 4 times a week now and absolutely loves it. In fact she’s very good now and is a couple of years better than her age so that is one silver lining that has come out of her hip condition. The only benefit for me is that as I’m not going outside much, my usual blast of January onwards hay fever has not really made an appearance this year. Usually the silver birches (I think) at the golf course are my Kryptonite at this time of year. It is usually horrendous.

The Kryptonite for markets is undoubtedly inflation at the moment and it’s that time again with US CPI today the main event of the week. Last summer on a couple of occasions I suggested that the then upcoming day’s US CPI number could be the most important economic data release in perhaps a generation given the potential for regime change. However the summer inflation prints whilst consistently higher than expected were largely shrugged off by the market so my hyperbole was clearly misplaced. Without repeating my mistake, we are approaching a crucial point for US CPI. If we don’t start gliding lower in line with expectations soon, the market is going to be pricing some 50bps Fed hikes into the equation for 2022. Today’s number is a complicated one as Omicron could create distortion that unwind next month.

As readers will likely be familiar, recent months have seen repeated upside surprises, with the monthly headline CPI print above the consensus estimate on Bloomberg for 8 of the last 10 releases, sending the year-on-year number up to +7.0% for the first time since 1982. In terms of what to expect, our US economists are looking for a further increase in the year-on-year figure to +7.2% (in line with consensus), with core also rising to +5.8% (consensus 5.9%). That said, their view is that the month-on-month measure should subside to +0.38% from +0.58% in December, which would be a 5-month low and mark a third consecutive decline in the monthly reading. Core is expected to dip to +0.40% from +0.58% mom.

The wildcards might be lodging away and airfares due to Omicron. These fell -2.7% and -8.6% last August around the Delta variant. So the risks feel a touch skewed toward the downside this month even if that will likely be a temporary thing given the Omicron wave is well past the peak. Structurally we still see primary rents and OER as seeing enough upward pressure to keep the glidepath lower (when it comes) more shallow than the market thinks regardless of what happens today. As an aside, food prices continue to increase which won’t help, with Bloomberg’s Agriculture Spot index up +1.68% yesterday to its highest levels since 2011.

We’ll have to wait and see what happens, but it was only last Friday that a much stronger-than-expected jobs report turbocharged calls for a 50bp hike from the Fed. Immediately afterwards, futures moved to pricing in a more than 40% chance one could happen, although that number’s since fallen back to 30% this morning. Fed Chair Powell notably did not rule out moving by 50bps at the press conference after the last meeting, and a higher-than-expected inflation number today would only add fuel to the fire.

On the other hand, yesterday we did begin to see some signs of pushback on recent market pricing, with a number of central bank officials adopting a more cautious and measured tone relative to the market narrative of recent days. The comments on Monday evening from the ECB’s Villeroy after the European close that there “were perhaps reactions that were very high and too high in recent days” helped matters from the get-go. We then heard from the Fed’s Mester (a voter on the FOMC this year), who didn’t find a compelling case for raising rates by +50bps at liftoff. And earlier in the day, BoE Chief economist Pill also said that “I worry that taking unusually large policy steps may validate a market narrative that bank policy is either foot-to-the-floor on the accelerator or foot-to-the-floor with the brake”.

That pushback held more water in Europe, where there was a rally across all maturities and countries, with yields on 10yr bunds (-5.3bps), OATs (-5.5bps) and BTPs (-9.6bps) all moving lower on the day. Bunds saw their first yield fall in 12 days and ended the longest run of increases since reunification in 1990. Meanwhile in the US, the yield curve twist flattened, with 2yr Treasuries +2.3bps higher and 10yr Treasuries down -2.2bps, bringing the 2s10s yield curve to a fresh low of just +57bps yesterday, the lowest closing level since October 2020. Nevertheless, US rate moves were small in magnitude with most investors looking to CPI today as a key risk event.

Even with some pushback to the recent yield rises, the global tightening continued apace yesterday, with Romania’s central bank announcing a 50bps hike in their monetary policy rate, and Iceland’s central bank announced a 75bps hike in their 7-day term deposit rate as well, their biggest hike since 2008.

With the bond rout easing yesterday, equities continued their advance as both the S&P 500 (+1.45%) and Europe’s STOXX 600 (+1.72%) closed at their highest level in a week. It was a very broad-based advance for both indices; 428 companies in the S&P were in the green, the second-highest number of 2022 so far, while every sector advanced. Tech and mega cap stocks put in a strong performance in particular, with the NASDAQ (+2.08%) and the FANG+ index (+2.44%) both seeing a decent advance for the second day running.

Overnight in Asia, equity markets are struggling to find direction with the major indexes fluctuating in the morning trade. The Nikkei (+0.33%) and Kospi (+0.25%) have reversed early morning losses while the Shanghai Composite (-0.10%), CSI (-0.52%) and the Hang Seng (-0.48%) are all moving lower. Meanwhile, shares of China Evergrande Group in Hong Kong are up +2.99% after reports came in that the embattled developer plans to deliver 600,000 apartments this year and will refrain from selling off its assets to repay its debt. Elsewhere, the Reserve Bank of India (RBI) decided to keep its repo rate unchanged at +4.0% and will continue with its accommodative stance to foster economic growth. Additionally, the central bank has projected real GDP growth at +7.8% for FY 2022-23. Looking forward, equity futures are pointing to a weak opening in the US with contracts on the S&P 500 (-0.21%) and the NASDAQ (-0.30%) both lower ahead of the crucial US inflation data later today.

On the data front, Japan’s producer price inflation in January came in +8.6% year-on-year, which is a slight decline from the previous month’s +8.7%, but was still some way above the +8.2% expected. Against that backdrop, Mainichi reported Bank of Japan Governor Kuroda saying that there is “no chance” that monetary easing would be reduced, and that the chance of a big increase in inflation as seen elsewhere was “very low”.

Staying on central banks, the Boston Fed named Susan Collins, an economist serving currently as executive vice president of University of Michigan, as their new President. Regional Fed Presidents get to vote on the FOMC every three years, and this year the Boston Fed President is up. We’re sure to learn more about her monetary policy views before she assumes office in July.

Finally, a number of countries have been removing Covid restrictions lately, and in the UK Prime Minister Johnson announced yesterday that all remaining restrictions in England could end later in February. He said he’d be announcing a plan to live with Covid on February 21, so if we do see an end to restrictions that will provide an interesting example to other countries amidst increasing political momentum to get back to normal. Over in the US, Dr Fauci also said in a recent FT interview that he hoped that pandemic restrictions could end in the months ahead, whilst New York Governor Hochul said that the state’s mask mandate for businesses would end today.

To the day ahead now, and the aforementioned US CPI release will be the main highlight. Other data releases include the US weekly initial jobless claims and the monthly budget statement for January. From central banks, we’ll hear from BoE Governor Bailey, ECB Vice President de Guindos, and the ECB’s Lane and Villeroy. Earnings releases include The Coca-Cola Company, PepsiCo, Philip Morris International and Twitter. Finally, the European Commission will be publishing their latest economic forecasts.

Global investors are on the edge of their seats this morning ahead of the inflation data from the US. The print could show January accelerated .4%, for a 7.2% increase from one year ago, which would be one of the highest inflation readings in four decades. This reading would imply tighter monetary policy from the Federal Reserve.

Ahead of US inflation data, European investors were “shocked” by Unilever Plc’s awful margin outlook due to soaring inflation costs. It appears 4Q21 sales were better than expected, but that’s not what investors focused on, as it became apparent the market concentrated on margin compression, eroding the benefits of faster growth. 

Diving into the earnings report, the British multinational consumer goods company that makes food, condiments, ice cream, wellbeing vitamins, minerals, and supplements, among many other things, expects raw material costs to increase by $2.3 billion. The company said its operating margin will shrink by 2.4 percentage points in 2022, adding it doesn’t expect margin recovery until 2023 and complete recovery by 2024. 

Chief Financial Officer Graeme Pitkethly told investors that Unilever is passing along costs to consumers, with pricing last quarter at the highest in a decade. He blamed soaring commodity costs. 

Pitkethly said the rapid increase of crude oil, palm oil, soybean oil, and other commodities used to produce consumer goods are some of the leading causes of rising costs. “This hasn’t happened in well over a decade, if ever,” he warned. 

None of this is shocking as Goldman’s head commodity strategist and one of the closest-followed analysts on Wall Street, Jeff Currie, said earlier this week he’s never seen commodity markets pricing in the shortages they are right now.

“I’ve been doing this 30 years and I’ve never seen markets like this,” Currie told Bloomberg TV in an interview on Monday. “This is a molecule crisis. We’re out of everything, I don’t care if it’s oil, gas, coal, copper, aluminum, you name it we’re out of it.”

European equity strategist at Bank of America Milla Savova warned about intensifying pressure on margins for European companies. She explained the earnings-per-share beats relative to sales beats in the last quarter were the lowest level since the firm began tracking in 2012, “pointing to increased margin pressure.”

It appears Unilever Plc today was the latest victim of this trend. Here’s what other analysts are saying about the consumer goods company (courtesy of Bloomberg):

Barclays, Warren Ackerman (equal-weight):

• The margin guidance will probably drive sizeable consensus EPS downgrades and some will see this as a “clearing event” ahead of what activist Nelson Peltz may have been planning to say 
• Although the company predicts the restoration of margins in 2022 and 2023, the timing between 2022 and 2023 will be in focus 
• The buyback program and the ruling out of major acquisitions are among the positives from Thursday’s update 

Bernstein, Bruno Monteyne (underperform):

• The margin reset raises more questions than answers, such as what this says about the company’s pricing power and its long- term future
• The organic sales growth guidance might be challenging given the new margin outlook 

Jefferies, Martin Deboo (buy):

• The margin guidance is “dramatic” and seems to be because of commodity pressures instead of any “strategic reset,” and suggests consensus estimates being lowered by high-single digits
• The management team’s credibility will come under further pressure 

RBC, James Edwardes Jones (underperform):

• RBC had expected margin guidance to be for -30 bps to -40 bps, so the forecast for -140 bps to -240 bps is “quite shocking” 
•  Although the sales growth outlook is strong, RBC says the main focus should be on the margin outlook “and the lack of pricing power that it implies”

What’s surprising is that Unilever doesn’t have pricing power compared to its quality peers because management has been focused on ESG. Unilever’s management needs a shake-up, and an activist investor needs to step up to save the company from their “go woke” and now “going broke” trend. 

By Ven Ram, Bloomberg Markets live strateigst and commentator

Treasuries are holding their composure ahead of today’s U.S. CPI data, which is expected to show a fifth month of acceleration.

How the inflation landscape has so dramatically changed from a year ago is borne out from the Bloomberg economists’ survey, where not a single forecast is below 7%. The firm conviction stems perhaps from mild prints one year earlier. You would assume the outlook is baked into the markets by now – meaning any downside surprise will have a greater impact on immediate price action than a higher-than-forecast number.

For instance, a headline CPI number even slightly below 7% and an on-month core print below 0.5% would make the markets question its conviction on the need for a 50-basis point increase in March. While a print in line with the median will keep the speculative embers alive, the Fed will have the benefit of seeing the numbers for February before making a final call

Unless the numbers are shockingly soft, Treasury yields are likely to continue their trek higher — perhaps not immediately, though, given Wednesday’s auction demand — with the 10-year rate likely to approach 2.0904%. A number that is in line with the median forecast is likely to also keep front- and intermediate yields on the boil. In November, MLIV posited that front-end bonds represent a ticking time bomb and forecast the two-year yield to reach 1.75%, and the securities are well on there way to their intended destination.

Despite Finland long resisting calls to be put on a path to joining NATO (though closely cooperating with the military alliance), a political scandal has emerged this week after a top Finnish politician stated that it should be made clear that Ukraine will not joint NATO.

Member of the Finns Party Mika Niikko was forced to step down as parliament’s Foreign Affairs Committee chair over a Tuesday morning tweet. He stated while French President Emmanuel Macron was in Moscow meeting Putin that the French leader “should say publicly that Ukraine will not become a member of NATO.”

“Otherwise, the negotiations will be considered a failure from a Russian perspective and the consequences will be terrible. Are there no wise heads of state in the West who know Russia?” Niikko wrote further.

His party issued an immediate reprimand and the tweet created a media storm of controversy, with Finnish officials quick to clarify to Finland’s Western allies that this is not the country’s position on the Ukraine matter.

“Finland’s position is clear and has been restated regularly,” Centre MP Joonas Könttä said in the wake of the controversy. “All independent states have the right to decide on their own security. It is not Finland’s place to advise on how other states should make those decisions”.

According to Finnish media, Niikko deleted the tweet, saying “I openly admit that the tweet I published this morning was poorly formulated”…

He soon deleted the tweet, which suggested that Russia would not regard this week’s visit to Moscow by Macron as a success unless such a statement was forthcoming.

Niikko then told Yle that he supported Ukraine’s sovereignty, and had worded his tweet carelessly.

“The goal was not to take a position on whether Ukraine could seek Nato membership,” said Niikko. “Ukraine is fully entitled to make its own decisions.”