Between mid-October and the beginning of December, thanks to a series of favorable indicators, they were convinced that the rate peak would be below 5% and that the pivot would take place in May. The pivot is the moment when the Fed decides that the level of rates is optimal for its monetary policy. Equity markets are trying to anticipate it, because they consider that from then on, rates will remain at least unchanged or even start to fall again in a more or less foreseeable future. Lower rates mean easier access to money, which means improved economic dynamics and more money available for investment.

But Jerome Powell’s latest speech made it clear that the path to normalizing inflation requires a higher rate level and probably a less favorable timetable than investors imagine. This led to a return of risk aversion in equities. The Fed is overplaying its hand a bit, because it has the power to move the herd by voice, without needing to carry out (all) its threats. The bond market seems to have understood this because it didn't really blink last week.

So much for the central story, the backbone of market sentiment. On top of that come several important variables, which help shape the narrative of the moment. I see mainly the ECB, which has adopted a tone close to that of the Fed. Christine Lagarde has warned that European inflation will require further rate hikes. This is a blow to the urban legend that the ECB would be quick to abandon its hard line if the European economy shows signs of weakness.

China is another important factor, as the Covid situation is bound to get much worse before it gets better. The market welcomed the end of the zero-covid policy, supposedly to boost the Chinese economy and improve supply constraints. But it had forgotten that the pandemic is implacable and that it is likely to heat up in the weeks to come.

Thirdly, and this is the elephant in the room, aggressive rate hikes were implemented to reduce economic momentum and curb inflation. Macroeconomic data show that activity in Europe or the US is faltering. There could be considerable damage if these policies are miscalibrated. This is the famous hard or soft-landing debate. This will be measured in the depth of the recession, but it could look different on the two sides of the Atlantic.

Let’s not forget geopolitics, the energy crisis, the state of public finances, a major credit event linked to higher rates or the management of climate change.

Today, US equity futures were flat, while oil prices were higher due to optimism over China’s economic reopening.

 

Economic highlights of the day:

The Ifo business confidence index in Germany and the NAHB house price index in the US are on the agenda. All the macro agenda is here. 

The dollar is down 0.1% against the euro to EUR 0.9432 and fell 0.2% against the pound to GBP 0.8208. Gold is trading around 1791 dollars per ounce. Oil is consolidating, with North Sea Brent crude at USD 80.09 per barrel and US WTI light crude at USD 75.56. The yield on 10-year US debt is rising slightly around 3.52%. Bitcoin is trading around 16,700 dollars.

 

In corporate news:

* Tesla – The poll launched by Tesla CEO Elon Musk on Twitter shows that a majority of users want him to step down as head of the social network. In pre-market trading, the stock was up 4.7%.

* Defense company L3Harris Technologies announced the purchase of AeroJet RocketDyne, a rocket engine manufacturer, for $4.7 billion.

* Melco Resorts & Entertainment was down 5.3% in pre-market trading as the U.S. casino operator was among six companies that invested about $15 billion in renewing 10-year license agreements to continue operating in Macau, a Chinese special administrative region.

 

Analyst recommendations:

  • AeroJet: Jefferies downgrades to hold from buy. PT up 5.7% to $58.
  • Ameriprise: Keefe, Bruyette & Woods downgrades to market perform from outperform. PT up 4.1% to $325.
  • AstraZeneca: Baptista Research starts tracking to hold.
  • Baxter: J.P. Morgan cut the recommendation to neutral from overweight. PT up 11% to $55.
  • L3Harris: Baird analyst downgrades to neutral from outperform. PT up 13% to $241.
  • Marks and Spencer: J.P. Morgan upgrades from neutral to underweight, targeting GBp 100.
  • MGM Resorts: Baptista Research initiated coverage with a recommendation of buy. PT set to $45.10.
  • Moderna: Jefferies raised its recommendation on Moderna to buy from hold. PT jumps 42% to $275.
  • PentAir: Stifel upgrades to buy from hold. PT up 31% to $57.
  • PerkinElmer:  KeyBanc Capital Markets upgrades to overweight from sector weight. PT up 23% to $170.
  • Vertex Pharmaceuticals: Jefferies downgrades to hold from buy. PT up 12% to $340.
  • Warner Music: Atlantic Equities raised its recommendation to overweight from neutral. PT up 22% to $41.
  • Waste Management: Stifel downgrades to hold from buy. PT up 5.7% to $171.