- The FTSE 100 aims to recover 7,500
- S&P 500 set for worst month since March 2020 despite recent bounce
- Rates rises expected imminently in US and UK
Solid start to trade in Europe on Monday morning after a rip-roaring close for Wall Street on Friday, repairing some damage done last week. Shares in Frankfurt +1.5 per cent in early trade, London +0.3 per cent with the FTSE 100 trying to recover 7,500, the futures trying to recapture the 200-day moving average... still on to be about the only major index to end the month higher – energy and value has been a safer bet in January 2022 than tech and growth. Rates steady enough this morning, with US 10s around the 1.78 per cent mark, gold muted under $1,800 and the dollar easing back after Friday’s fresh cycle highs.
Wall Street shares leapt on Friday having opened lower; the S&P 500 rallied 2.5 per cent, the Nasdaq up more than 3 per cent. It was strong finish to a wildly volatile week. Doubt is whether the correction swing low is in yet, the longer we stay above 4,222 for the broad market the more you think the market will consider the correction done and move on to a positive grind higher with focus on earnings/fundamentals. Tantrums are usually on the threat, not on the deed. The market knows the Fed is tightening swiftly this year and possibly in every meeting. Retest of this area would be a catalyst for further volatility. Despite the Friday bounce the S&P 500 is still set for its worst month since March 2020, down 7 per cent MTD. The Nasdaq is -12 per cent in January, the Dow Jones -4.4 per cent. Smalls cap Russell 2k is off by 12.7 per cent in January. Growth vs value – no contest: the iShares S&P 500 Value ETF (IVE) is down 4 per cent YTD vs a drop of almost 14 per cent for the iShares S&P 500 Growth ETF (IVW).
Atlanta Fed president Raphael Bostic told the FT over the weekend it could be appropriate to raise rates by 50bps... hawkish but he usually is. Market is still working out whether the Fed will hike 3 or 8 times this year. Not a heck of a lot of data today... so far German inflation figures point to high print at a national level, above the -0.4 per cent month-on-month decline, year-on-year falling to 4.7 per cent from 5.7 per cent, that was expected. More pressure on the European Central Bank as hawks circle? Chicago PMI and FOMC member George on tap today. Key ISM and NFP reports for the US due later this week.
Data out Friday suggested inflation is not going away... US PCE inflation jumped to 5.8 per cent, a 40-year high, while core PCE inflation rose to 4.9 per cent, +0.5 per cent month-on-month. The rise in the PCE was higher than economists expected but could start to peak around 5.4 per cent in the next couple of months. A welcome development for the Fed is slowing wage growth, as personal income rose 0.3 per cent for the month, a touch lower than the 0.4 per cent estimate, and down from the +0.5 per cent in November. Spending fell the most since February, just as the retail sales indicated. Not a super-growth roaring economy story but higher inflation pressing on spending + growth. Michigan consumer sentiment bit lower, inflation expectations a bit higher.
The Bank of England this week is likely to raise interest rates. The labour market remains tight, growth largely unaffected by Omicron. Goldman Sachs are out with a call for three 25bps hikes this year, would be the biggest tightening cycle in a long while. New MPC member Catherine Mann said in her first speech recently: “I know that there has been a lot of talk already about the cost-of-living squeeze. And to be clear, it is not my goal to make this worse than it already is – to the contrary, I aim to bring inflation back down to target such that workers can enjoy real wage gains from their labour.” Should we welcome a political element to the MPC’s decision making? The European Central Bank is also in action...does it buckle to pressure as inflation builds? I think we get to see whether the hawks or doves are in the ascendancy.
Oil is just a tad below the multi-year highs set on Friday, with Brent around $90 and WTI at $87...focus is on Ukrainian situation and UN Security Council meeting this week. OPEC+ is due to meet on Wednesday and stick to planned production increase.
Earnings this week are focused on Big Tech: Alphabet (GOOGL), Facebook/Meta (FB), Amazon (AMZN)… Metaverse, cloud, stay-at-home trends…
Neil Wilson is the Chief Market Analyst at markets.com