Month: February 2024

House Judiciary Committee Chairman Jim Jordan (R-OH) has slapped a subpoena on Fulton County, Georgia, District Attorney Fani Willis for failing to comply with document requests related to allegations that Willis fired a whistleblower who tried to stop a top campaign aide from misusing federal funds.

A former employee in the DA’s office told Willis that she was demoted after she warned one of Willis’ campaign aides against misusing federal grant funding earmarked for a youth gang outreach program, according to a leaked recording of the call reported by the Washington Free Beacon.

As the Beacon‘s Andrew Kerr reported on Wednesday:

Less than a year into her tenure as Fulton County district attorney, in 2021, Willis met with Amanda Timpson, an employee in the district attorney’s office responsible for giving nonviolent juvenile offenders “alternatives to the juvenile court system.” During their conversation, a recording of which was reviewed by the Washington Free Beacon, Timpson claimed to Willis that she had been demoted after attempting to stop a top Willis campaign aide from misusing federal grant money meant for a youth gang prevention initiative.

According to Timpson, the aide, Michael Cuffee, planned to use part of a $488,000 federal grant—earmarked for the creation of a Center of Youth Empowerment and Gang Prevention—to pay for “swag,” computers, and travel.

“He wanted to do things with grants that were impossible, and I kept telling him, like, ‘We can’t do that,'” he told Willis in a Nov. 19, 2021 meeting. “He told everybody … ‘We’re going to get MacBooks, we’re going to get swag, we’re going to use it for travel.’ I said, ‘You cannot do that, it’s a very, very specific grant.’“

The subpoena, first reported by NBC News, is part of a broader probe by Jordan and his House Republican colleagues into whether Willis used federal funds while investigating former President Donald Trump, who she indicted last year on charges of attempting to overturn the results of the 2020 presidential election in Georgia.

In a Friday letter, Jordan accuses Willis of failure to comply with two earlier document requests pertaining to her office’s use of federal grant funds, and demands that she provides said documents, plus communications, “referring or relating to the Fulton County District Attorney’s Office’s receipt and use of federal funds,” and “referring or relating to any allegations of the misuse of federal funds.”

Willis’ office has condemned Jordan’s requests, writing last year in a letter to him that there is “no justification in the Constitution for Congress to interfere with a state criminal matter.”

Jordan’s push for documents follows allegations that the district attorney’s office retaliated against an employee who tried to stop what she said was misuse of Justice Department grant funding by a top Willis campaign aide.

According to Jordan, “Instead of using these federal grant funds for the intended purpose of helping at-risk youths, your office sought to use the grant funds to ‘get Macbooks … swag … [and] use it for travel,’” adding “Moreover, the whistleblower’s direct supervisor stated that these planned expenditures ‘were part of [your] vision.’”

“These allegations raise serious concerns about whether you were appropriately supervising the expenditure of federal grant funding allocated to your office and whether you took actions to conceal your office’s unlawful use of federal funds.”

When will it end with Fani? Who will get to the bottom of this?

Submitted by QTR’s Fringe Finance

“Freddo, you handle the pitch. But on the translation controllers, all backwards. So if the Earth starts drifting down you need to thrust aft, not forwards.”

— Tom Hanks as Jim Lovell, Apollo 13

I watched Apollo 13 on Netflix this weekend and was having recollections of this scene as I thought about the stock market getting ready for the week ahead.

The scene is as the crew are preparing for their manual burn to right their course, as they attempt an emergency landing back on Earth. Astronaut Jim Lovell is essentially reminding one of his crewmembers, who is maneuvering their lunar module, that all of the controls are backwards.

Talk about a great analogy for the stock market.

If there’s a lesson to be learned about being dead wrong about the market crashing due to high interest rates, it should be that because the market is a forward-looking mechanism, and because economic data often arrives with a lag, sometimes stocks literally do the polar opposite of what they “should” do.

Here’s the performance of stocks during the fastest and highest rate hike cycle in history, sitting on top of the largest pile of debt humanity has ever seen accrue:

It wasn’t really insane to postulate over the last two years that a quick spike in interest rates would eventually lead to economic calamity and markets crashing. Hell, it may still very well happen. But, putting aside whether or not I got the timing or the thesis wrong, let’s examine quickly why I’ve been wrong so far to begin with.

First, as I noted in an article last week, there is more excess savings left over from the multi-trillion dollar Covid liquidity dump that the Fed set off back in 2020 than expected. Ergo, this gives people more discretionary income and staves off the economic time bomb for a little bit longer than it normally would have taken to blow up with rates at 5%.

Second, rates moved higher than any time in recent history, but they also did it faster than any time in recent history as well. Given that there is about an 18 month to 2 year lag from the time rate hikes go into effect until they have an impact on the economy, we literally may not have even “hit the wall” yet. We could be looking at more of a blindingly quick, unexpected crash into the side of the mountain, as opposed to a prolonged, slow, grueling chokehold of rate hikes, which resulted in the crashes that we saw back in December 2018 — the worst December since 1931. To believe in the soft landing bullshit, you have to look at the below chart and believe the first slow, chokehold of rates moving higher caused a crash, but that the second increase in rates will not cause a crash.

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Does that seem likely, or does it seem like we’re just early in predicting it? The first crash came 3 years after we started hiking.

Third, think of this analogy: we are standing on one side of a river, and the river represents economic consequences. The other side of the river represents where we need to wind up as an economy – the “landing”. Despite all of the jawboning on CNBC and by the Biden Administration, we remain on the first side of the river. All of the victory laps being taken by Krugman, CNBC and the government right now amount to us simply talking about how we’re going to cross the river and how great it’s going to be there, but we haven’t even started to forge our way across yet. Remember The Oregon Trail? We’re literally just “looking around”.

The regional banking crisis was the first “dip of the toe” in the water, to which we responded by bailing out the banks — essentially pulling our foot hastily back out of the water, running away and resorting to more jawboning instead of actually making our way across the river.

Everyone is once again closing their eyes and pretending that there isn’t a rate hike timebomb in the economic river of the country somewhere and we’ve all held hands, sung Kumbaya and collectively decided that it’s totally possible and completely rational to expect to jump from 0% rates — all the way across the river from hikes to anticipating Fed cuts — without touching the stream of consequences between the two.

Anyway, read this closely: just because we have made it this far without a major economic calamity, and just because we have reached the point where the market is looking forward to rate cuts, doesn’t mean that we have successfully leapt from one side of the river to the next. In fact, we are still on the side we started at, spinning yarns about how wonderful it’s going to be when we reach the other side.

We have no idea what will take place when we try to cross the river. Here’s what I think 2024 will hold:

And then eventually:

How’s that for economic analysis?

Finally, layered on top of all of these mechanisms that are fooling the populace into thinking that nothing is wrong, we have a foul, sour layer of icing on the cake that tastes like heavy cream that’s been sitting in the summer sun for a week: financial media and every single person in the Biden administration and at the Federal Reserve crowing about how we have, once again, “beaten the game” and usurped the laws of basic economics, leading us further down the path to their vision of utopia, where a dollar loses 50% of its purchasing power in 8 seconds and the wealth inequality gap expands, accordion-like, resembling Chris Christie’s gullet before he attempts to swallow an entire sheet cake whole, without chewing.

For example, inflation apologist Paul Krugman is proud to proclaim that 2023 was a “miraculous year”.

But I digress. Obviously, two years is a long time to be predicting that the market will crash, only to watch it rage to new all-time highs. And so, take my analysis with a grain of salt, as I also try to do. As I look back over the last two years and think about what I wish I had known when we started raising rates, it would have been all of the above items. Now, looking forward, how can I use what I have learned to try and better forecast where we are heading over the next year or so?

I already laid out at the beginning of the year what I thought the biggest risks were for the stock market going forward in my article laying out my 24 stocks I’m watching for the year. Let’s review these:

1. Geo-political unrest from hot wars. I continue to see risk for the global economy and the world from the ongoing conflicts in Ukraine and the Middle East. Not only do these conflicts have the potential to drag other nations into them, metastasizing across the globe, but they also had and will have financial consequences for the United States, which is involved in subsidizing these wars in both locations. Continued empire building is the last thing the United States’ fiscal policy needs right now, and the longer these conflicts drag on, the more of a negative effect they will likely have on the financial condition of our country. The wild cards here are the United States presidential election and whether or not China will attempt to take Taiwan. I think the latter hinges on the former, although there is a case to be made for China making its move before President Biden is potentially shown the door.

2. Bifurcation of the world in general. As a result of Russia’s attack on Ukraine and the subsequent seizure of hundreds of billions of dollars in Russian FX reserves, the United States and the West have drawn a line in the sand between them and the BRICS nations. Globally, countries are aligning with either NATO and the West or BRICS, China, and Russia. As the delta between these two sides of the world continues to widen, the chance for profound catastrophic conflict grows. I’m not saying World War III is going to happen in 2024, but I am saying that the setup for it looks clearer each passing day. Along with challenging the Western way of life, countries like Russia, China, and India have made it clear that they want to challenge the US dollar — and they control a lot of the world’s commodities (especially oil). For the first time since the 1970s, Saudi Arabia is trading oil in a currency other than the US dollar. Russia, China, and India have also made marked declarations to trade and settle in local currencies. The central banks of China and Russia have been stock-piling gold. There is as much risk of a conflict economically, and through the means of cyber warfare, as there is of a military conflict, in my opinion. At some point, our creditors are going to call our bluff, and the treasury market could dry up. It wouldn’t surprise me if 2024 is the year for this.

3. The US is unlikely to find a needle in the financial haystack. As everyone enjoys their holidays and looks forward to the new year, very few people seem to understand how precarious the United States’ financial position is. Not only is our debt to GDP soaring at around 120%, but our government and the people in charge have made no marked effort to arrest and cauterize the problem. On the contrary, we continue to spend money we don’t have aggressively and have bet everything on the heavy favorite that the US dollar’s reserve status is going to hold up. As anybody who lays chalk in the sports betting world knows, heavy favorites often come in, but they don’t always come in. With the stock market overvalued on pretty much any historical metric you can find and interest rates at 5% with no Covid-style helicopter money coming down the pipe, conditions for another year of economic and financial status quo and complacency can only be met by finding a needle in the financial haystack. While TV news anchors crow about a soft landing, the reality is that the plane hasn’t touched ground yet and what nobody seems to understand is that Jerome Powell is tasked with landing a B-52 bomber on the head of a pin. And as strategists need an excuse to continue pumping the stock market, all the major market industries are banking on now is hope. Stocks have pulled forward the idea of rate cuts, and we are once again just closing our eyes and hoping that animal spirits—hereafter referred to as figments of our fucking imagination—continue to drive stocks higher. I think we are overdrawn at the good news bank and are going to need to make a substantial deposit at some point soon.

4. Inflation or deflation surprises. Despite spending the last decade publicly admitting that inflation is a mystery and we have no idea how it works, how it is created, or why we need or don’t need it, we have somehow felt confident enough to declare victory over it. I find the irony of that hilarious. I don’t know which situation is more likely, but in the coming year I don’t think inflation is just going to mellow out at 2% and hold that line because Janet Yellen keeps repeating it over and over, as if that is the solution to conjuring up the sought-after result. Rather, I think inflation will either surprise us and tick back up again, especially if the Fed starts to ease and liquidity in the economy frees up a little bit more or – the slightly more likely scenario in my opinion – 5% rates and the lag of the last two years of hikes will continue to grind the economy to a halt, and we might even see deflation. This would usher in de-leveraging and a thirst for liquidity that might have everybody selling everything that isn’t bolted down. Ultimately, the deflationary scenario would eventually result in even more quantitative easing because the Fed would be able to say that they are trying to bring inflation back and trying to jumpstart the economy while saving the stock market at the same time. In both situations, it’s tough to envision a scenario where the Fed doesn’t return to some type of emergency easing over the next 12 to 18 months.

And so the fifth risk I want to introduce today is the idea that the market may do exactly the opposite of what people think it is supposed to do, similar to the way it has acted over the last two years.

If you recall, there were several pieces over the last two years where I wrote about the fact that market crashes didn’t start until the Feds started to cut rates. As a refresher, the red dots are rate cuts:

Cuts usually come just after hikes have happened and are set to manifest in the economy.

Bearing all of this in mind, it feels apt to ask what would happen if, once again, the market did the opposite of what it “should” be doing.

As we head into this year, with a major expectation of cuts – despite the fact that inflation isn’t necessarily a finished task yet – what would happen if the market started to experience a drawdown? From there, ask what would happen if that drawdown continued, or even accelerated, as the Fed rushed to try and cut rates to cushion the blow?

Right now, the market is living by the “economic delay and excess liquidity” sword.

This could ultimately be the same sword that the market may die from over the next year or two.

If we had two years of interest rate hikes, and then the next two years were spent euphorically bidding up stocks, while those rate hikes did their dirty work in the underbelly of the economy, and then, the next two years we spent cutting rates, what would the market be doing if its reaction was based on a rolling two-year delay of past events? This is the above scenario where the Fed could be cutting rates, and the market could be crashing at the same time.

The idea is that in the event the market crashes while the Fed is riding to the rescue, or planning to ride to the rescue, it doesn’t mean that there will be a swift turnaround in equities like there was in March 2022. I don’t think people understand this at all, and that this could stun people and cause panic. In fact, such a situation could wind up serving as the breaking point for 15 years of flawed behavioral psychology that reinforced significant malinvestment dating back almost two decades.

It seems like a situation that is extremely unlikely, right? The market, sentiment, and animal spirits, all breaking at the same time for the first time in 20 years during a period of Fed interest rate cuts? It seems completely unprecedented. But I can’t help but think that now is one of the best times in economic history to remind ourselves that the path we are on has been unprecedented in of itself.

Unprecedented paths lead to unprecedented outcomes. Expected the expected unexpected.

Now read:

• The Bitcoin Debate: Peter Schiff vs. Larry Lepard
• 24 Stocks I’m Watching For 2024: Part 2
• 7 More Stocks To Watch In 2024

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Sky News Arabia is reporting Friday morning that major US strikes against Iran-aligned targets may begin within hours, while NBC is once again reporting that Biden’s counterattack plan in response to the killing of three Americans last weekend is expected to unfold over days and possibly even weeks.

The speculation over the scope of the expected attacks has grown with each passing day that there are no strikes. An overnight Israeli attack on parts of Damascus triggered initial speculation it could have been the start of the US operation, but it appeared another Israeli ‘one-off’ hit on Syria.

A southern district of the Syrian capital was targeted, reportedly resulting in the death of an Iranian Revolutionary Guards adviser. Recent weeks have seen an uptick in these Israeli operation which have as their aim the assassination of IRGC commanders in Syria.

“The Britain-based Syrian Observatory for Human Rights, an opposition war monitor, said the strike hit a farm housing members of Lebanon’s Iran-backed militant Hezbollah group and other Iran-backed factions,” Associated Press reported.

“It said the strike killed seven people, including four Syrians, one of whom was the bodyguard of a member of Iran’s paramilitary Revolutionary Guard. It did not give the nationalities of the others,” the report added. State media sources additionally described:

“At approximately 4:20 a.m. today, the Israeli enemy launched an air aggression from the direction of the occupied Syrian Golan, targeting a number of points south of Damascus. Our air defense media responded to the aggression’s missiles and shot down some of them, where the losses were limited to material losses.”

The deadly Israeli attack is a sign of what’s imminently to come with the larger, broader US operation expected to take place across parts of Syria and Iraq. 

Iran’s President Ebrahim Raisi issued a warning in response Friday, saying Tehran is ready to “respond strongly” to anyone trying to bully Iran. “We will not start any war, but if anyone wants to bully us they will receive a strong response,” he said in a televised speech.

“Before, when they (the Americans) wanted to talk to us, they said the military option is on the table. Now they say they have no intention of a conflict with Iran,” Raisi added. “The Islamic Republic’s military power in the region is not and never has been a threat.”

There have meanwhile been widespread reports saying Iran has already pulled its senior officers out of Iran. This has led some Congressional leaders to criticize the Biden administration’s telegraphing the strikes too much, saying the time delay and media reports have allowed Iran and their proxies to prepare. Republican Congressman from Florida Mike Walz said the extent of foreknowledge and wait time makes the whole operation “deliberately unserious”. 

US defense officials have repeatedly said the weather is a major determining factor as far as the timing of the coming strikes…

The US has approved strikes against Iranian targets in Iraq and Syria, in response to the killing of three US soldiers in Jordan.

Citing unnamed US officials, CBS said weather and visibility are going to be a major factor in the timing of the strikeshttps://t.co/c6DBUXsYkq

— Middle East Eye (@MiddleEastEye) February 2, 2024

In a Thursday briefing, Defense Secretary Lloyd Austin was asked whether the US has telegraphed its response too much to the point of essentially allowing leaders to return to Iran. He essentially dodged the question, saying, “We will have a multi-tiered response.”

In Iraq, the AFP is reporting Friday that the pro-Iran Al-Nujaba movement and affiliated militias are vowing to keep up attacks on US troops, no matter Washington’s military response in the region.

Authored by Peter Tchir via Academy Securities,

A simply stunning jobs report!

The highest estimate for the Establishment number was 300k and the report beat that high estimate, quite handily, coming in at 353k!

Not only that, but we broke a string of downward revisions, by adding 126k in total to the past 2 reports, with the bulk of that revision for the December report! Back to back months over 300k is impressive and is maybe why confidence numbers have been so high?

Simply a stunning number of jobs created (according to the Establishment survey).

Even the Household survey was barely negative (Establishment shows 700k job gains past 2 months, while Household is at -700k) making this report more consistent than prior reports.

Unemployment ticked down, but only because labor participation shrunk by 0.1% – something I don’t like to see, but not a major move.

One “outlier” if you can call it that on this report, is that average hours worked declined from 34.3 to 34.1, which is viewed as a sign of weakness. But that weakness isn’t anywhere else in this report.

Hourly earnings are great if you get earnings! 0.6% on the month, which is the highest since March 2022! If you are worried about inflation, and I am, that is a mildly disturbing statistic.  Last month’s annual number was revised up to 4.3% and this month’s annual number topped that at 4.5%! That takes us back to September levels and unwinds a trend of declines. The Fed has to pay attention to this!

If you believe the numbers, and I’m sure I’m not the only person skeptical about the numbers, not only is March completely off the table, the “pivot” talk may have to be walked back.

While the Fed said “data dependent” the market heard “watching the data to know when to cut”. This data, if supported by any signs of inflation (don’t forget consumer spending has remained strong) may force Powell’s hand to backtrack on cut talks. It is premature to think that, but as the wage growth data sinks in, more discussions about the appropriateness of pivot will pop up.

Bottom Line

If you believe the numbers, price in few cuts, start later, and push longer term yields much higher.

I expect only a portion of that move will get priced in, because the numbers are so stunning they are almost unbelievable!

The one thing that gives me a degree of confidence that the numbers might be realistic, is because of the confidence and spending data we’ve been seeing, which has surprised to the upside, but maybe it shouldn’t have been a surprise if jobs are back to plentiful and raises are the norm.

Well, we did warn readers that anyone hoping for a negative print in an election year would be disappointed, and moments ago the BLS proved us right.

With Wall Street expecting a continued declines in the pace of monthly growth, and consensus looking for a decline from last month’s 219K print to 185K, the BLS decided to once again show logic and common sense who is boss, and damn your mass tech layoff torpedoes…

Dear @BLS_gov, since you have trouble finding actual data, we’ve made it easy for you – here are the layoffs announced in the past few months:

1. Twitch: 35% of workforce
2. Hasbro: 20% of workforce
3. Spotify: 17% of workforce
4. Levi’s: 15% of workforce
5. Zerox: 15% of…

— zerohedge (@zerohedge) January 31, 2024

… it reported that in January the US created a ridiculous 353K jobs…

… double the 185K expected, and higher than than the highest forecast estimate, which as a reminder was 300K. In fact, as shown below, this was a 4-sigma beat to expectations…

… and putting the beat in the context of the past year, it was an absolute blowout:

What is notable is that once again there was a huge dispersion between the Establishment and Household Surveys, and while the former indicated an increase of 353K, the latter reported a drop in Employment of 31K!

Clearly none of that mattered to the BLS which had just one mission: to make the economy look double super good-good, and it wasn’t just payrolls which blew away expectations, the unemployment rate also slipped, staying at 3.7%, vs expectations of an increase to 3.8%. That said, Among the major worker groups, the unemployment rates for adult men (3.6 percent), adult women (3.2 percent), teenagers (10.6 percent), Whites (3.4 percent), Blacks (5.3 percent), Asians (2.9 percent), and Hispanics (5.0 percent) showed little or no change in January.

More notable was the sudden jump in wages, with the BLS reporting that average hourly earnings increase 0.6% from December (and double the 0.3% estimated increase), rising 4.5% YoY, also blowing away estimates of a 4.1% increase.

But, in keeping with the endless gimmicks by the BLS, this is not because of an actual wage increase but because people literally worked less (the denominator in the average hourly earnings equation) as the average workweek for all employees on private nonfarm payrolls decreased by 0.2 hour to 34.1 hours in January and is down by 0.5 hour over the year, down to the lowest level seen in the depths of the covid crisis.

Developing

 

Developing.

The massive beat for payrolls, and resurgence in average hourly earnings, prompted a sharp response from markets with the dollar spiking, along with bond yields, as gold and the yield curve tumbled, as rate-cut expectations plunged…

A March cut is now priced at around 20% and 2024 cut expectations have dropped to 125bps…

Source: Bloomberg

The dollar spiked back to unchanged on the week…

Source: Bloomberg

Treasury yields soared, led by the short-end (2Y +19bps). 10Y yields are back above 4.00%…

Source: Bloomberg

Gold dumped…

Source: Bloomberg

Bitcoin is also sliding, back below $43,000…

Source: Bloomberg

And finally, all the US major equity markets are tumbling, led by Small Caps, back into the red from before the FOMC…

Now we all wait to see what Powell says on 60 Minutes…

Last November, OPEC+ agreed to voluntary oil production cuts totaling about 2.2 million barrels per day. These cuts begin in the first quarter of this year, with Saudi Arabia rolling over a 1 million bpd voluntary reduction. Now, sources within OPEC+ have informed Reuters that coalition members are scheduled to discuss whether or not to extend oil production cuts in March. 

Two OPEC+ sources tell the media outlet that production cuts will be reviewed in March. They said an announcement will follow the meeting and reveal if these voluntary cuts will be extended. 

On Thursday, OPEC member Algeria said it was committed to continue voluntary cuts into the second quarter if needed. Kuwait said it was committed to the supply curbs but gave no firm answer if they should be extended.  

Earlier on Thursday, leading ministers from OPEC+ gathered in an online discussion about market conditions and oil production levels and made no changes to the current policy. 

“The meeting was a very healthy, quick meeting and what we noticed is that there is good cohesion among members. There was reiteration of commitments,” another OPEC+ source said.

OPEC countries and allies have implemented supply curbs to prevent a global supply surplus from crashing crude prices. They’re also dealing with slowing demand growth (China) and US shale production soaring, sending total US crude production to new records. 

Prices of Brent crude have chopped around $80 a barrel for more than a year, despite recent conflicts erupting in the Middle East and Iran-backed Houthi rebels attacking dozens of commercial vessels with suicide drones and missiles in the Red Sea.  

The latest International Energy Agency forecast revealed that global oil markets could slide back to a surplus next quarter and remain oversupplied through this year – if OPEC+ eases curbs and revives production. 

All eyes are on OPEC+’s March decision, as any announcement will likely spark volatility in global energy markets. 

Authored by Ven Ram, Bloomberg cross-asset strategist,

The non-farm payrolls data for January is unlikely to move the needle much for the rates markets so long as the narrative of economic resilience remains intact.

The labor market has traditionally fared well in the first month of the year, with the actual headline number coming in way higher that forecast over the past two January iterations.

A better-than-forecast reading today won’t tell the Fed anything that it doesn’t already know about the strength of the labor market.

The jobless rate has been close to historical lows at 3.7% and a marginal uptick to that number, in line with the forecast, isn’t exactly going to bring the labor market back into balance immediately.

Hourly wage earnings are still growing at a 4%+ clip, which is largely incongruent with the Fed’s overall inflation target.

That is perhaps one reason why Chair Jerome Powell suggested earlier this week that policymakers are “looking for more good data on inflation” and need continued evidence price pressures are waning.

Absent a shocker from today’s jobs report, Treasuries may decide to march to a drumbeat that has been dictated by concerns about the health of the banking industry.

The bid tone has also been pronounced ahead of Powell’s upcoming TV interview over the weekend, where, as colleague Mark Cranfield points out, the chatter seems to be focused on the Chair using the opportunity to persuade wavering voters within the FOMC that it is time for a rate cut.

US futures and global markets rallied on Friday after tech megacaps Meta and Amazon.com posted blowout earnings (even as Apple dropped on a plunge in China sales and disappointing guidance) and as investors awaited a jobs report expected to support the case for interest-rate cuts. As of 7:30am, S&P 500 futures rose 0.7% while the Nasdaq 100 rose 1% after the indexes advanced by more than 1% Thursday. Rates were flat with 10Y yields unchanged around 3.88% while the dollar dropped and oil extended losses. All eyes will be on today’s jobs report; we also get the latest Factory Orders, Durables Goods and Michigan sentiment (and inflation outlook) prints.

The sharp gains in the past two days meant that the S&P is once again on track for aweekly gain, which will make it 13 increases in the past 14 weeks!

In premarket trading, Meta soared 17% and Amazon rallied 7.1% after the tech behemoths smashed quarterly profit expectations. The pair’s results boosted social media and e-commerce peers, with Snap up 6.8% and Shopify rising 4.8%. Apple slipped after its earnings showed weakness in China. Big Oil added to the earnings buzz Friday, with Chevron and Exxon Mobil shares rising after both beat profit expectations. Here are some other notable premarket movers:

• Atlassian (TEAM US) shares fell 8.6% as analysts said the application software company’s cloud metrics came in short of expectations.
• Amazon (AMZN) shares jumped 6.7% after fourth-quarter results beat expectations and the company’s outlook for operating income surpassed estimates. Analysts cited operating income and the company’s Amazon Web Services (AWS) businesses as highlights.
• Apple (AAPL US) shares fell 2.7% after weakness out of the greater China region overshadowed strong results in most product categories. Analysts expect that competition in China will intensify.
• Intel (INTC US) shares fell 1.2% following a Wall Street Journal report that the chipmaker is delaying a $20 billion chip facility planned for Ohio, sparking worries over its capital expenditure plans.
• Meta Platforms (META US) jumps 18% after the Facebook parent reported fourth-quarter results that beat expectations and gave an outlook that is seen as strong. It also introduced its first ever dividend.
• Skechers (SKX US) shares slid 10% after the footwear company issued full-year sales and earnings per share guidance that trailed consensus estimates.
• Solo Brands (DTC US) fell 2.5% as JPMorgan double-downgrades the stock to its only underweight rating, citing growing concerns around shifts in the outdoor product retailer’s business model since its IPO.

After a torrid week there is one more major market event: Friday’s US jobs report is expected to show a slower hiring pace in 2023 after figures out Thursday showed rising jobless claims,  and following annual revisions, indicating the labor market was softer than realized (full preview is here). Wall Street expects 185K payroll gains with a wide range of forecast between 120K and 300K. Bloomberg economists see the unemployment rate edging up to 3.8%, from 3.7% in December.

Investors will parse monthly US jobs figures due later for confirmation of further cooling in the labor market that might encourage policy easing by the Federal Reserve.

“Any move closer to 4% could see markets changing bets on when Fed cuts could begin,” economists at Rand Merchant Bank in Johannesburg said in a note to clients.

Investors will also continue to closely track developments around smaller banks as an index for the sector heads for its worst week since the fallout from the banking crisis last May. New York Community Bancorp has plunged 45% since shocking investors Wednesday by reducing its dividend, posting a quarterly loss and ramping up loan-loss provisions for exposure to commercial real estate.

Meanwhile, as investors rush into technology stocks, Bank of America strategists said they see similarities with the bubble of 1999, with markets assuming that the economy will perform strongly, despite tighter monetary policy. While falling yields were pushing the Nasdaq higher in the fourth quarter, the script has now flipped to both rising over the past four weeks. This price action would typically only occur after a recession, such as in 2009 or the dot-com bubble around the turn of the century, BofA strategists led by Michael Hartnett wrote on a note. Hartnett’s view on the rising dominance of tech stocks resembles a warning by JPMorgan strategists earlier this week that the US equity market is increasingly drawing similarities with the dot-com bubble.

European stocks are also higher, led by real estate and auto names. The Stoxx 600 is on course for back-to-back weekly gains for the first time this year, with most subgroups on the regional benchmark notching gains, with the real estate and automotive subindexes the biggest risers, while the energy sector the biggest laggard. Mercedes-Benz Group AG shares rose as much as 3.3% and Danske Bank climbed 6.7%. Here are the biggest movers Friday:

• Danske Bank shares rise as much as 6.5%, the most in three months, after reporting results, with Jefferies saying capital distributions are the “key positive” element
• Vallourec climbs as much as 9.6% after French tube-maker reported “good” preliminary fourth-quarter Ebitda that beat estimates, and will likely also beat 2023 expectations, Oddo says
• Zalando rises as much as 5.7% after Morgan Stnaley raised its rating on the European fashion platform to overweight, saying it will be a key online volume share winner as inflation slows
• OCI jumps to highest since April after the stock was raised to buy by Berenberg, which flags “lots of cash, lots of options” as fertilizer maker is about to unlock $6.1b of divestment proceeds
• SAP gains as much as 2.2% to a record high after Jefferies upgraded the software firm to buy, saying there is now “no reason to question growth” given elevated cloud revenue in its pipeline
• Mercedes rises as much as 3.3% after reporting preliminary industrial free cash flow for the full year that beat the average analyst estimate, with Deutsche Bank seeing upside potential
• Delivery Hero falls as much as 13% to record lows after Malaysian newspaper New Straits Times reported that the food delivery firm’s talks to sell its Southeast Asia business to Grab collapsed
• Electrolux falls as much as 6.8% after the Swedish home appliances firm flagged a gloomy outlook for the first half of 2024, according to Citi. It also failed to pay a dividend last year
• Lem shares fall as much as 8.2%, most since July 2022, after the Swiss electrical component manufacturer’s results missed estimates and it cut its sale guidance
• YouGov falls as much as 2.5%, dropping from a one-month high hit yesterday, after suffering a slow start to the financial year because of the challenging macro-economic environment
• Close Brothers falls as much as 5% as RBC cuts its recommendation on the UK bank to sector perform as it expects shares to be held back by FCA reviews into motor loans and premium finance

Earlier in the session, the picture was more mixed in Asia, where key Chinese benchmarks pared steep declines in a session marked by wild swings. A broader gauge of the region’s stocks climbed 0.7% with South Korean shares leading the charge. The MSCI Asia Pacific Index rose as much as 1.1%, with Tencent among the biggest contributors to the gauge’s gain after China approved a slew of online games. South Korea’s benchmark Kospi headed for its best week since November 2022, boosted by automakers and other holding firms amid a push by authorities for better valuations.

• Hang Seng and Shanghai Comp were both initially boosted with outperformance in automakers after their January delivery updates, while tech names were supported after China’s NPPA approved 32 imported online games. However, stocks then gradually reversed course after the PBoC continued to drain liquidity despite next week’s Lunar New Year holiday. Later in the session Chinese stocks rebounded shortly after the Shanghai Composite fell to fresh multi-year lows under 2,700; with some highlighting increased capital flows from Hong Kong via Stock Connect
• Nikkei 225 gained with headlines dominated by another busy day of earnings results, while Aozora Bank suffered another double-digit drop after it recently flagged losses linked to US commercial property loans.
• ASX 200 printed fresh all-time highs with real estate and tech front running the gains amid softer yields.

In FX, the Bloomberg Dollar Spot Index fell 0.1% while the Australian dollar tops the G-10 FX leaderboard, rising 0.5% versus the greenback. The yen is among the weakest, dropping 0.2%.

• AUD/USD rose as much as 0.5% to 0.6603 as the Australian dollar led G-10 gains against the dollar on bolstered risk appetite; Japanese yen led G-10 losses
• GBP/USD rose as much as 0.2% to 1.2768, the highest level in over a week, as markets bet on the BOE lagging other major central banks in cutting rates; Gilts underperformed Treasuries and EGBs with front-end yields climbing 6-8bps

In rates, Treasuries were unchanged with the curve flatter, pushing 2s10s and 5s30s spreads beyond Thursday’s lows. The move was led by pronounced bear-flattening of gilts curve, a laggard among core European rates. Front-end yields cheaper by around 3bp with long-end slightly richer on the day, leaving 2s10s, 5s30s spreads flatter by 2.5bp and 2bp. Two-year yields rose 2bps to 4.22%, while 10-year yields were little changed around 3.88%, with bunds and gilts lagging by 1.5bp and 6bp in the sector. Dollar issuance slate includes KDB 3Y/5Y; just one deal was done Thursday, bringing weekly volume to just over $20b, in line with $20b to $25b expected; dealers are calling for about $150 billion of new supply in February.

In commodities, oil headed for the biggest weekly loss since early November as negotiations advance for an agreement to pause the Israel-Hamas war in what could be a crucial step toward ending the conflict; oil prices advanced, with WTI rising 0.7% to trade near $74.30, after the contracts settled lower by $2/bbl for WTI and USD 1.85/bbl for Brent after mixed reporting regarding a Gaza ceasefire yesterday; currently Brent holds below the $79.50/bbl.  Gold headed for its largest weekly increase since the start of December as lower Treasury yields offered support for the metal, amid the concerns over US regional banks.

Looking to today’s calendar, economic data includes January jobs report (8:30am), January final University of Michigan sentiment and December factory orders (10am). Federal Reserve Chair Jerome Powell will appear on CBS News’s 60 Minutes this Sunday and will discuss inflation risks, expected rate cuts and the banking system, among other topics, the network said; no Fed members are scheduled to speak Friday while other central bank speakers include ECB’s Centeno and BoE’s Pill. Finally, earnings releases include ExxonMobil, Chevron and Aon.

Market Snapshot

• S&P 500 futures up 0.5% to 4,954.25
• STOXX Europe 600 up 0.5% to 486.32
• MXAP up 0.7% to 167.35
• MXAPJ up 1.2% to 510.00
• Nikkei up 0.4% to 36,158.02
• Topix up 0.2% to 2,539.68
• Hang Seng Index down 0.2% to 15,533.56
• Shanghai Composite down 1.5% to 2,730.15
• Sensex up 0.6% to 72,074.30
• Australia S&P/ASX 200 up 1.5% to 7,699.40
• Kospi up 2.9% to 2,615.31
• German 10Y yield up 2 bps at 2.17%
• Euro up 0.2% to $1.0894
• Brent Futures up 0.4% to $79.03/bbl
• Gold spot down 0.0% to $2,054.65
• US Dollar Index down 0.12% to 102.93

Top Overnight News

• Stocks posted broad gains Friday after robust earnings from technology giants and as investors looked forward to a US jobs report expected to show further cooling in the labor market in a boost for hopes of interest-rate cuts.
• Meta Platforms Inc. and Amazon.com Inc. spent 2023 cutting costs and re-focusing their businesses. It was a strategy that upended the lives of displaced tech workers in Seattle and Silicon Valley, but appears to have paid off handsomely for investors who are likely to continue reaping benefits.
• A monthly US jobs report due Friday will probably show a slower pace of hiring in 2023 following annual revisions, according to Bloomberg Economics.
• A sense of panic gripped Chinese investors on Friday as shares swung sharply in the final hours of trading before closing at a five-year low.
• Federal Reserve Chair Jerome Powell will appear on CBS News’s 60 Minutes this Sunday and will discuss inflation risks, expected rate cuts and the banking system, among other topics, the network said.
• Oil headed for the biggest weekly loss since early November as negotiations advance for an agreement to pause the Israel-Hamas war in what could be a crucial step toward ending the conflict.

A more detailed look at global markets courtesy of Newsquawk

APAC stocks mostly took impetus from the gains on Wall St where stocks were underpinned amid a softer yield environment and with US equity futures boosted following the big tech earnings. ASX 200 printed fresh all-time highs with real estate and tech front running the gains amid softer yields. Nikkei 225 gained with headlines dominated by another busy day of earnings results, while Aozora Bank suffered another double-digit drop after it recently flagged losses linked to US commercial property loans. Hang Seng and Shanghai Comp were both initially boosted with outperformance in automakers after their January delivery updates, while tech names were supported after China’s NPPA approved 32 imported online games. However, stocks then gradually reversed course after the PBoC continued to drain liquidity despite next week’s Lunar New Year holiday. Later in the session Chinese stocks rebounded shortly after the Shanghai Composite fell to fresh multi-year lows under 2,700; with some highlighting increased capital flows from Hong Kong via Stock Connect

Top Asian News

• China National Press and Publication Administration approved 32 imported online games, according to Reuters.
• China urges state Cos to step up equity investments in new equity firms, via Bloomberg
• IMF says China growth is projected to slow to 4.6% in 2024 amid the ongoing weakness in the property sector and subdued external demand. Inflation expected to increase gradually to 1.3% in 2024.

European bourses, Stoxx600 (+0.5%), are on a firmer footing, taking impetus from gains in Wall Street and further optimism also stemming from blockbuster earnings from Amazon (+6% pre-market) and Meta (+16.7% pre-market). European sectors are mostly firmer; Autos takes the top spot benefitting from outperformance within the sector in APAC trade and after a positive update from Mercedes-Benz. Energy is the major laggard, dragged down by weaker crude prices following mixed reporting on a ceasefire in Gaza. US equity futures (ES +0.5%, NQ +1.1%, RTY U/C) are firmer, with clear outperformance in the NQ, being led higher by significant strength in Amazon (+6.7%) and Meta (+16.7%) post-earnings; though, Apple is softer by over 2%.

Top European News

• Citi/YouGov UK Inflation Expectations: 12-month 3.9% (prev. 3.5%), 5-10yrs 3.6% (prev. 3.4%). Short-run expectations increased amid an increase in shipping disruption.
• Riksbank comment on the Swedish National Audit Office’s report: Riksbank recognises that circumstances may arise in the future, in which purchases of securities may be an appropriate way to influence inflation. Further analysis is required.
• German Engineering Orders in December -6% Y/Y (Domestic -13%, Foreign -3%), according to VDMA

Earnings

• Amazon.com (AMZN) – Q4 2023 (USD): EPS 1.00 (exp. 0.80), Revenue 169.96bln (exp. 166.21bln).SALES BREAKDOWN:Online stores 70.54bln (exp. 68.91bln). Physical Stores 5.15bln (exp. 5.23bln). Third-Party Seller Services 43.56bln (exp. 41.96bln). AWS 24.20bln (exp. 24.22bln). GEOGRAPHICAL REGIONS: North America 105.51bln (exp. 102.88bln). International 40.24bln (exp. 38.96bln). KEY METRICS: Third-party seller services net sales excluding F/X +19% (exp. +15.9%). AWS net sales excluding F/X +13% (exp. +11.8%). Operating income 13.21bln (exp. 10.49bln). Operating margin 7.8% (exp. 6.17%). North America operating margin +6.1% (exp. +4.12%). International operating margin -1% (exp. -1.27%). Fulfillment expense 26.10bln (exp. 25.2bln). GUIDANCE: Q1 net sales view 138.0-143.5bln (exp. 142.01bln). Q1 operating income view 8-12bln (exp. 9.1bln). CFO said improved delivery speeds have led to increased purchase frequency by customers across major geographies, and there are no immediate plans for dividend. (Amazon/Newswires) Shares rose 7.1% after-market. Index weightings: SPX (3.5%), NDX (4.9%). Shares up 6.1% pre-market
• Meta Platforms Inc (META) – Q4 2023 (USD): EPS 5.33 (exp. 4.96), Revenue 40.11bln (exp. 39.17bln); authorised 50bln increase to share buyback programme and declared cash quarterly dividend of 0.50/shr. KEY METRICS: Advertising revenue 38.71bln (exp. 38.12bln). Facebook DAUs 2.11bln (exp. 2.07bln). Facebook MAUs 3.07bbln (exp. 3.06bln). Ad impressions +21% (exp. +24.6%). Average Family service users per day 3.19bln (exp. 3.11bln). Average Family service users per month 3.98bln (exp. 3.93bln). GUIDANCE: Q1 revenue view 34.5-37bln (exp. 33.34bln). Meta (META) noted the FTC is seeking to substantially modify consent order on Meta and if contesting is unsuccessful, this could impose additional restrictions on its ability to operate and would adversely impact its business. CEO said the Co. is getting ready to roll out AI services more widely in coming months, adds Threads now has more people using it daily than initial launch and Metaverse focus this year is going to be growing mobile version of Horizon. CFO said Co. will discontinue reporting of Facebook monthly and daily active users, Co. expects to maintain an active share repurchase program. (Meta/Newswires) Shares rose 15.2% after-market. Index weightings: SPX (2.2%), NDX (4.2%). Shares up 16.8% pre-market
• Apple Inc (AAPL) – Q1 2024 (USD): EPS 2.18 (exp. 2.10), Revenue 119.58bln (exp. 117.91bln). Greater China revenue 20.82bln (exp. 23.5bln). REVENUE BREAKDOWN: Products 96.46bln (exp. 95.14bln).iPhone 69.70bln (exp. 68.55bln). Mac 7.78bln (exp. 7.9bln). iPad 7.02bln (exp. 7.06bln). Wearables, home and accessories 11.95bln (exp. 12.02bln). Service 23.12bln (exp. 23.37bln). KEY METRICS: Total operating expenses 14.48bln (exp. 14.62bln). Gross margin 54.86bln (exp. 53.56bln). Cash and cash equivalents 40.76bln (exp. 38.81bln). Apple expects March quarter total revenue and iPhone revenue to be similar to the previous year after accounting for inventory replenishment. Expects gross margins between 46%-47% for fiscal Q2. Expects operating expenses of USD 14.3bln-14.5bln in fiscal Q2. Expects services business to show double-digit growth similar to the December quarter in fiscal Q2. CEO Cook said the Co. will make announcements this year on new AI features. CEO Cook added that FX was a headwind for China sales, and the decline in China sales was in part on a stronger USD. (Apple/Newswires) Shares fell 2.9% after-market. Index weightings: SPX (6.6%), NDX (8.7%), DJIA (3.2%) Shares down 2.5% pre-market
• Microchip Technology Inc (MCHP) – Q3 2024 (USD): Adj. EPS 1.08 (exp. 1.04), Revenue 1.77bln (exp. 1.77bln). GUIDANCE: Q4 adj. EPS view 0.46-0.68 (exp. 0.91). Q4 revenue view 1.225-1.425bln (exp. 1.66bln). COMMENTARY: Taking steps to limit discretionary spending and tightly manage inventory levels during downcycle. Cautious about demand in near term given weak macro environment and customers’ ongoing actions to reduce inventory. (Newswires) Shares down 3.1% pre-market
• TomTom (TOM2 NA) – Q4 (EUR): Revenue 143mln (exp. 142mln), Net -11.6mln (exp. -23mln), EBIT -10.4mln (exp. -29mln). FY24 Outlook: Revenue 570-610mln (exp. 600mln). Shares up 9.2% in European trade / Garmin shares up 0.7% in pre-market trade.

FX

• DXY has pivoted around the 103.00 mark compared to levels closer to 103.50 in recent sessions as yield-driven selling in USD saw the index hit a trough of 102.91. In what has been a contained few weeks of trade for the USD, a soft NFP could see a test of the Jan 24th low at 102.77.
• EUR remains supported by recent USD selling but unable to muster a test of 1.09; last breached on Jan 25th at 1.0901.
• JPY is the only major currency softer vs. the USD as the JPY’s recent tepid recovery vs. the dollar pauses for breath. Ultimately, the pair remains at the whim of relative Fed/BoJ expectations. Currently sits at the 21DMA and within yesterday’s 145.89-147.11 range.
• AUD attempting to recoup recent lost ground vs. the USD which saw the pair hit a trough of 0.6508 yesterday.
• PBoC set USD/CNY mid-point at 7.1006 vs exp. 7.1655 (prev. 7.1049).

Fixed Income

• USTs are softer and pivoting Wednesday’s 112-20+ peak ahead of NFP, which is expected to print at 180k (prev. 216k).
• Bunds are weaker by around 60 ticks but still over 100 ticks from the week’s 134.37 trough; the German 10yr yield has recovered back to 2.18% but is still set to close the week out lower.
• Gilts are the relative underperformer but similarly well within WTD 98.56-100.62 parameters with drivers thin post-BoE though we await commentary from Chief Economist Pill.
• Italian Treasury says foreign investors bought 70% of new 15yr BTP syndicated bond

Commodities

• Choppy/contained across the crude complex this morning ahead of US jobs data, and after the contracts settled lower by USD 2.03/bbl for WTI and USD 1.85/bbl for Brent after mixed reporting regarding a Gaza ceasefire yesterday; currently Brent holds below the USD 79.50/bbl.
• Precious metals are trading horizontal in the run-up to the US jobs report in an otherwise quiet European morning; whilst base metals are mixed with early China-induced weakness trimmed as the USD edges lower; XAU holds above USD 2050/oz and within a tight range.
• Iraqi oil exports averaged 3.3mln BPD in Jan (prev. 3.5mln in Dec); Average price USD 77.536/bbl (prev. USD 76.96/bbl in Dec)

Geopolitics

• Hamas said they are still in the stage of consultation between internal and foreign leaders on the exchange deal, while it received the Paris truce proposal but has not given a response to any parties and it is still being studied. Furthermore, it cannot say the current stage of negotiations is zero, but also cannot say they have reached an agreement.
• An Iranian revolutionary guard advisor killed in Israeli strike on Damascus, Syria, via semi-official Iranian News site..
• Iraq’s pro-Iran Al-Nujaba movement vows to keep up attacks on US troops, according to AFP
• North Korea fired several cruise missiles off its west coast, according to South Korea.

US Event Calendar

• 08:30: Jan. Change in Nonfarm Payrolls, est. 185,000, prior 216,000
  • Jan. Change in Private Payrolls, est. 170,000, prior 164,000
  • Jan. Change in Manufact. Payrolls, est. 3,000, prior 6,000
  • Jan. Unemployment Rate, est. 3.8%, prior 3.7%
  • Jan. Underemployment Rate, prior 7.1%
  • Jan. Labor Force Participation Rate, est. 62.6%, prior 62.5%
  • Jan. Average Weekly Hours All Emplo, est. 34.3, prior 34.3
  • Jan. Average Hourly Earnings YoY, est. 4.1%, prior 4.1%
  • Jan. Average Hourly Earnings MoM, est. 0.3%, prior 0.4%
• 10:00: Dec. Durable Goods Orders, est. 0%, prior 0%
  • Dec. Durables-Less Transportation, est. 0.6%, prior 0.6%
  • Dec. Cap Goods Ship Nondef Ex Air, prior 0.1%
  • Dec. Cap Goods Orders Nondef Ex Air, prior 0.3%
• 10:00: Dec. Factory Orders, est. 0.2%, prior 2.6%
  • Dec. Factory Orders Ex Trans, est. 0.2%, prior 0.1%
• 10:00: Jan. U. of Mich. Current Conditions, est. 83.5, prior 83.3
  • Jan. U. of Mich. Sentiment, est. 78.9, prior 78.8
  • Jan. U. of Mich. Expectations, est. 76.0, prior 75.9
  • Jan. U. of Mich. 5-10 Yr Inflation, est. 2.8%, prior 2.8%
  • Jan. U. of Mich. 1 Yr Inflation, est. 2.9%, prior 2.9%

DB’s Jim Reid concludes the overnight wrap

Welcome to payrolls Friday and if you want a bit of light relief as we draw towards the close of a busy week then note that we have a fancy dress quiz night for parents at my kids’ school tomorrow night and I’m going as Dame Edna Everage. My wife is going to have a field day turning me into her. Why I agreed to this I don’t know and why I’m telling you I don’t know either so please don’t tell anyone. I’m actually hoping some of the younger parents know who she was and don’t just think that’s my normal Saturday night attire.

Onto more weighty matters, our recent “ Everything points to a soft landing except… .. history ” pack, suggested that the current US data points to a soft landing (with more evidence yesterday as we’ll see below). However, history cautions that the lags from a hiking cycle are long and variable and regularly have a substantial sting in their tail. Often these come from an unforeseen event. Clearly in this cycle, the Regional Bank shock was dealt with aggressively by the Fed last year. However this was mainly helping them out with high quality assets (e.g. treasuries and MBS) that had been (and still are) marked down. Although the BTFP ends in March, the market generally would expect the Fed to do something similar if the need arose and therefore are less likely to force them to. However if the next round of problems covered CRE then could the Fed really intervene as quickly or as easily given a more challenging moral hazard issue? Underwater CRE which could be impaired is a very different proposition to underwater Treasuries.

We’re clearly some way from that at the moment but it’s worth highlighting that the latest attack on US regional banks is more for fear of potential credit losses than the mark to market losses of high quality securities of last year, which could be more easily mitigated via liquidity measures. On a related theme, it will be interesting to see the Fed’s SLOOS on Monday to see whether banks have continued to loosen conditions relative to what are still very tight lending standards to the wider economy and CRE.

Notwithstanding a second day of US Regional Bank losses (-2.28%), the S&P 500 roared back last night to close +1.25%, reversing most of Wednesday’s -1.61% decline. The market shrugged off the continued concerns over New York Community Bancorp, which fell a further -11.1% (-44.6% over 2-days) after news the previous evening that Moody’s had placed their credit ratings on review for a downgrade. The S&P 500 bank index was down -1.38% (-3.34% over 2-days). But overall, equities seemed to respond to the data whereas the bond market saw a flight to quality as 10yr US yields fell -3.2bps to 3.88%. Overnight in Japan it’s been a similar story, with Aozora Bank currently the worst performer in the Nikkei with a further -15.55% decline, but the Nikkei as a whole is still up +0.70%. Meanwhile, March Fed Funds futures are pricing in a 38% chance of a cut this morning, up from 35% after the FOMC influenced close on Wednesday.

As all that was going on, we then heard from Apple, Amazon and Meta after the close. All three beat earnings estimates, with a mixed but overall positive reaction in extended trading. Meta saw a stunning gain (of c. 15%) after hours, as its revenue guidance for Q1 came in clearly above analysts’ expectations, and the company announced additional share buybacks and its first ever dividend. Amazon gained 7%, also posting a strong profit outlook for Q1. This is despite its sales guidance for Q1 actually coming in a touch below estimates, and investors appeared to reward both companies for their cost control efforts. By contrast, Apple’s shares were down close to 3% in after-hours trading, with a deepening sales slump in China taking the shine off what was otherwise a modest beat. Prior to the results, the Magnificent Seven outperformed yesterday, gaining +1.59%. This morning, NASDAQ 100 futures are trading up +0.99%, and those on the S&P 500 are up +0.54%.

Talking of Apple, they are due to release their Vision Pro headset today. We conducted a survey of over 3,300 consumers to assess their perceptions and readiness for AR, VR, and the metaverse which should give you an idea of how ready consumers are for the next round of technology to be launched from the Magnificent Seven. See the full chartbook on the Metaverse, AR, & VR just published by Marion Laboure and Cassidy Ainsworth Grace here.

Looking forward now, the main highlight today will be the US jobs report for January, which will be one of the first pieces of hard data that covers 2024. Our US economists are looking for a +200k (consensus +185k) rise in nonfarm payrolls, and for unemployment to rise a tenth to 3.8% (in line with consensus). Remember as well that this report is set to see more substantial revisions than usual, since it’s the annual benchmark revision that can affect the numbers throughout the entirety of 2023, and not just the previous two months. It’ll also be an important print when it comes to the timing of rate cuts from the Fed, with March still in the balance regardless of what Powell said 36 hours ago.

Before the jobs report, there was some good news from the ISM manufacturing print, which rose to a 15-month high of 49.1 (vs. 47.2 expected). And on top of that, growth in nonfarm productivity surpassed expectations in Q4, coming in at an annualised rate of +3.2% (vs. +2.5% expected). So that added to the sense that a soft landing was increasingly likely, and it meant the Atlanta Fed’s latest GDPNow estimate for Q1 now stands at an annualised growth rate of 4.2%. The main point of weakness was in the weekly initial jobless claims, which rose to 224k (vs. 212k expected) in the week ending January 27, whilst continuing claims were up to 1.898m (vs. 1.839m expected) in the week ending January 20, the second highest reading since November 2021.

Over in the Euro Area, the main news came on the inflation side, as the flash CPI release for January came in a bit higher than the consensus had expected. That showed headline CPI only fell by a tenth to +2.8% (vs. +2.7% expected), and core CPI also fell a tenth to +3.3% (vs. +3.2% expected). To be fair, that’s the lowest core inflation has been since March 2022, but the slower decline has added to questions about how soon the ECB will actually be able to cut rates. At the same time, we also heard that the Euro Area unemployment rate had remained at 6.4% in December, matching its joint-lowest since the single currency’s formation. These releases saw pricing of a March cut by the ECB decline from 23% to 17%, and overnight it’s down to 16%.

Here in the UK, the Bank of England announced their latest policy decision yesterday, where they left rates unchanged as expected. There were a few elements of ongoing hawkishness in the decision. In particular, the BoE’s latest inflation forecasts showed inflation above target during H2 2024 and 2025, based on market rate expectations. So the implication was that the amount of cuts priced in would keep inflation too high in the years ahead. Moreover, even as 6 of the 9 committee members voted to hold rates, 2 preferred another 25bp hike, whilst 1 voted for a 25bp cut. BoE Governor Bailey also said that they “need to see more evidence that inflation is set to fall all the way to the 2% target, and stay there, before we can lower interest rates”.

But as with the Fed the previous day, there was a growing sense of a gradual shift towards considering rate cuts. Notably, the summary dropped the earlier explicit tightening bias, instead saying that the “MPC remained prepared to adjust monetary policy as warranted “ and adding that it “will keep under review for how long Bank Rate should be maintained at its current level.” In the press conference, Governor Bailey noted that the MPC “won’t leave Bank Rate on hold any longer than we need to”. Markets dialled back the chance of a cut by May, which fell from 77% to 62% by the close, but there was little change in end-24 pricing with over 110bps of cuts priced by the December meeting. Our UK economist continues to see the first rate cut coming in May – see his full reaction here.

When it came to markets in Europe, equities caught up with the post-Fed selloff, and the STOXX 600 (-0.37%) ended its run of 6 consecutive daily gains. Yields also moved lower, although given the CPI print, the declines weren’t as big as the US, with those on 10 yr bunds (-2.0bps), OATs (-0.5bps) and BTPs (-0.5bps) seeing smaller moves. Gilts outperformed, with the 10yr yield down -4.8bps.

Overnight in Asia, there’s been a mixed performance for equities. On the one hand, the KOSPI (+2.76%) has surged this morning, which came as investors expected reforms to the South Korean stock market, which the finance minister announced the previous day. Moreover, the January CPI data surprised on the downside in South Korea, with headline inflation down to +2.8% (vs. +2.9% expected). By contrast, Chinese equities have seen further losses, with the CSI 300 (-0.98%) currently on track to close at a 5-year low, whilst the Shanghai Comp is down -1.25%. Otherwise, the Hang Seng (+0.16%) has posted a modest gain, and the Nikkei is up +0.70%, despite the performance from Aozora Bank (-15.55%).

To the day ahead now, and the main highlight will be the US jobs report for January. Other US releases include factory orders for December, and the University of Michigan’s final consumer sentiment index for January. Central bank speakers include the ECB’s Centeno and the BoE’s Pill. Finally, earnings releases include ExxonMobil and Aon.

Cocoa prices climbed to a 46-year high this week in New York as concerns mount that seasonal Harmattan winds across West Africa could dry cocoa fields and reduce yields for the Ivory Coast’s mid-crop in April. This would pressure global cocoa production even further. 

Bloomberg reports the most active cocoa futures jumped as much as 2.2% to $4,961 per ton in New York. Prices are up 126% since Sept. 2022, threatening to raise costs for the world’s top chocolate makers, such as The Hershey Company.  

According to Donald Keeney, senior meteorologist at Maxar Technologies Inc., average temperatures across West Africa are 2 degrees Celsius above normal for the next few weeks. He said the region was “a lot drier and warmer than usual for the past month” and will continue this trend, adding that the Harmattan “is certainly a bit stronger than usual this year.” 

Ivory Coast is the world’s largest cocoa producer, and lower production has been a major bullish catalyst for soaring cocoa prices. 

On Monday, the Ivory Coast government said farmers shipped 1 MMT of cocoa to ports from October 1 to January 28, down 36% from the same period last year. 

A week ago, the Ivory Coast cocoa regulator, Le Conseil Cafe-Cacao, halted forward cocoa sales for the 2024/25 season due to sliding cocoa production. 

This has also fueled worries that the current level of cocoa production will be unable to restock supplies and prevent a worldwide shortfall of the bean, widely used in candy. 

Last month, Jonathan Parkman, the head of agricultural sales at Marex Group, warned: “I don’t think we’ve seen the worst of the situation for consumers.” He means the worst of ‘candyflation‘ has yet to be realized.