The Early

Markets: message received

The minutes of the last Fed meeting underlined the determination to address high inflation, despite the move to a slower pace of rate hikes. A modest market response suggested that the recalibration of expectations since the strong US labour market report has already priced in that message.

Ahead of the minutes, Eurozone bond yields extended their recent climb. The German 10y bund nudged 2.6% for the first time since 2011. The banks -2.1% and real estate stocks -1.4% led most Eurozone equity indices to a lower close; there were some pockets of earnings-driven outperformance, notably from Danone +4% and Stellantis +2%.

UK gilt yields moved to a 2023 YTD high, as the recent flurry of stronger than expected activity readings push the implied peak in bank rate towards 4.75%. It was a day for the defensives with beverages +0.9%, food retail +0.7% and tobacco +0.4%. But the mid/small caps are struggling, with all 12 of our PHySiCS sectors lower over the past week; notably travel & leisure -3.6%, technology -2.5% and financials -2.4%. The style factors are becalmed.

Overnight. A choppy, low volume US session saw the S&P slip in the final hour to a 4th straight daily decline. Only materials +0.7% and consumer discretionary +0.5% ended higher among the S&P sectors. With Japan on holiday, the rest of Asia found some stability, helped by the semiconductor stocks after strong numbers from Nvidia. Oil steadied after a six losing days and US yields are shade lower since early yesterday. Europe is called little changed.

Early numbers. Dow -0.26%, S&P -0.16%, NASDAQ +0.13%, Russell 2k +0.34%, VIX 22.29, US 10-yr 3.92%; Nikkei closed, Hang Seng -0.24%, Shanghai Comp -0.27%; £=$1.2070, £=€1.1357, Brent $80.78/bbl, Gold $1832.40, FTSE 100 indication -11 (at 6.35 UK).


Macro: options open


The minutes underlined how the US economic data are now determining the Fed's reaction function, and the return to 25bp moves allows greater flexibility. "Participants generally noted that upside risks to the inflation outlook remained a key factor shaping the policy outlook." There was a range of opinions across members about the likelihood of a recession, underlining the continued uncertainty surrounding the outlook for household spending and business investment.

Germany's IFO survey recorded a 5th straight monthly improvement in February. The headline index rose to 91.1 (f/c 91.2; Jan 90.1), with the retail sector recording the biggest improvement. Supply chain issues continue to ease, helping to reduce inflationary pressure“The German economy is gradually working its way out of a period of weakness… (it) will not get around a recession, but it will be a mild one." The nation's final inflation estimate for January confirmed the flash reading of +0.5% MoM, +9.2% YoY, with the upward pressure from energy and food prices remaining elevated.

Today’s events. Eurozone January final HICP (10.0) -0.2% MoM, +8.6% YoY; UK February CBI Distributive Trades survey (11.0) reported sales balance -13%; US Q4 GDP 2nd est. (1.30) +2.9% QoQ saar.


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