So far, the FTSE is up about 1%, and it seems that markets are reacting positively to the news. In the US, the strength of the rise in Wall Street indexes yesterday shows that the US central bank has passed its final test of 2021. In this kind of setup, we always have to wait for the dust to settle to get a more subtle view, but we have to admit that the first impression is very positive. The S&P500 and the Nasdaq gained 1.63% and 2.35% respectively at the close.
Yesterday, the Fed had some potentially painful announcements to make. In particular, it had to confirm the end of a number of measures to support the economy, i.e. the gradual disappearance of the liquidity gun that has been feeding financial markets for years. Not surprisingly, asset purchases will be reduced rapidly and will cease completely in March. Critics had long been calling for the continuation of this measure, which was considered unnecessary since the economy had taken off again with a bang.
At the same time, the central bank provided a precise schedule for its rate hike program. There will be three this year and three next year, each by 25 basis points. That's a bit more aggressive than economists were expecting, who saw only two in 2022, especially since the Omicron variant entered the equation. According to the CME's FedWatch indicator, based on Fed Funds futures contracts, the first round of tightening is expected on May 4, although the probability of a hike as early as the March 16 meeting has gained strength since last night, while remaining below 50%.
The speech was firmer than expected, which is usually synonymous with a negative market reaction. But in this case, the US central bank had paved the way quite a bit and investors are appreciating the new, well-marked route, which gives the impression that the Fed has regained control of events. This is not so bad considering the huge gap between the current reality and previous projections. "The Fed is now projecting a 150 basis point tightening in 2022/2023, which is a huge difference from earlier this year when it was planning to leave policy unchanged until 2024," notes ING economist James Knightley. Meanwhile, inflation has gone from "transitory" to "unbridled." The craziest thing is that in the meantime, the main indexes have recovered 20% and continued to rise yesterday on the announcement of this slightly more austere program than expected!
But we'll have to wait for the dust to settle. The monetary tightening program will have macroeconomic consequences in the medium term. At this stage, the reactions of the various asset classes, with the exception of equities, have been really modest, especially in government bonds. But we know that this market is sometimes a little slow to relax. It is worth emphasizing an important point, which also explains the reasons for the optimism of markets since last night: the level of key rates that observers expected for the end of 2024 is not really changed (it is marginally higher). What is changing is the tempo for getting there, which has been accelerated. Jerome Powell has been busy convincing people that U.S. growth is strong enough to withstand a faster tightening, and the speech seems to have hit home. In other words, conditions are better than in 2014/2016, when the last episode of "tapering" was followed by a rate hike in the US.
Economic highlights of the day:
A big day today, with the release of December PMI indices and a battery of central bank decisions: Switzerland, England and ECB. In the United States, there is also a lot of activity with building permits, weekly jobless claims and the Philly Fed index, followed by industrial production.
The dollar/euro pair is trading at EUR 0.8820 this morning, while the ounce of gold rose to USD 1788. Oil is trading at USD 74.32 per barrel for Brent and USD 71.26 for WTI. Bond yields are up slightly with a 10-year T-Bond paying 1.42%. Bitcoin is steady at USD 48,774.
* The Boeing Company - Qantas Airways, a longtime Boeing customer, announced Wednesday that it has chosen Airbus as its preferred supplier for the renewal of its domestic fleet at the expense of the U.S. aircraft manufacturer.
* Apple - The group has decided to postpone the return to work of its employees to an unspecified date because of the health situation, the Bloomberg agency reported on Wednesday, citing an internal memo from the chief executive, Tim Cook. Apple also announced the temporary closure of three of its stores in the United States and Canada due to the outbreak.
* Ford, General Motors, Tesla - Wells Fargo said Thursday it expects the U.S. auto sector to recover next year, thanks in part to a possible improvement in semiconductor supply. Tesla shares are up 2.3% in premarket trading.
* Intel - The semiconductor designer and manufacturer announced Thursday that it plans to invest $7 billion in a new factory in Malaysia that will come on line in 2024 and create some 9,000 jobs as several industries face a global shortage of components.
* Twitter - Russia has fined Twitter 10 million rubles for failing to remove content deemed illegal by authorities, a Moscow court said Thursday.
* KKR - Telecom Italia (TIM), targeted by a takeover bid from U.S. fund KKR, lowered its 2021 earnings forecast for its domestic business, the third earnings warning in a year. In addition, Vivendi, TIM's largest shareholder, is considering pushing for an overhaul of the Italian group's board, according to four sources familiar with the matter.
* Moderna - Japan on Thursday approved Moderna's COVID-19 vaccine for use as a booster dose.
* Novavax - The company has submitted an application to license its COVID-19 vaccine in Japan, where it hopes to begin marketing in early 2022. The stock gained 2.7% in pre-market trading.
* Pfizer, BioNTech - Health authorities in New Zealand approved Wednesday the use of the COVID-19 vaccine developed by the two companies in children aged 5 to 11.
* Gap - The U.S. apparel company announced Thursday that it has signed an agreement to sell its Old Navy brand to Mexico's Grupo Axo for an undisclosed amount. Gap shares rose slightly to $16.70 in pre-market trading.
* Amplify Energy - The pipeline operator suspected of causing an oil spill in California last October was indicted Wednesday, along with two of its subsidiaries, for "negligence" by a federal prosecutor.
AT&T: Morgan Stanley raised its recommendation to overweight from equal-weight. PT up 26% to $28
BioNTech ADRs: Morgan Stanley initiated coverage with a recommendation of equal-weight. PT set to $294
Booking: RBC Capital Markets raised its recommendation to outperform from sector perform. PT up 27% to $2,700
Bunzl: Peel Hunt cut its recommendation to add from buy. PT up 9.3% to 3,200 pence
Canadian National: Vertical Research Partners downgrades to hold from buy. PT up 0.4% to C$165
CDK Global: Morgan Stanley downgrades to equal-weight from overweight. PT up 18% to $48
Ceres Power: Credit Suisse starts tracking as Outperform, targeting GBp 1450.
Citrix: Goldman Sachs reinstated coverage. with a recommendation of sell. PT set to $75
Columbia Sports: Stifel downgrades to hold from buy. PT up 12% to $111
Domino's Pizza Group: Peel Hunt upgrades to buy from add. PT up 10% to 475 pence
Essex Property: Scotiabank downgrades to sector underperform from sector outperform. PT down 4% to $338
ITM Power: Credit Suisse starts tracking at underweight, targeting GBp 340.
Jefferies: Morgan Stanley initiated coverage with a recommendation of equal-weight. PT set to $40
Merck & Co: Daiwa Securities initiated coverage with a recommendation of neutral. PT set to $70
Oneok: Wells Fargo Securities downgrades to equal-weight from overweight. PT up 11% to $66
Progressive: Keefe, Bruyette & Woods downgrades to underperform from market perform. PT down 9.6% to $92
Twilio: Goldman Sachs reinstated coverage of Twilio Inc. Class A with a recommendation of buy. PT up 34% to $350
Under Armour: Stifel downgrades Under Armour Inc. Class A to hold from buy. PT up 7.3% to $24