MARKET WRAPS

Watch For:

Weekly Chain Store Sales; Johnson Redbook Retail Sales Index; API Weekly Statistical Bulletin; Senate Banking Committee holds nomination hearing for Jerome Powell; World Bank's Global Economic Prospects

Opening Call:

Stock futures inched higher Tuesday and the bond yield rally paused ahead of testimony from Jerome Powell in which the Federal Reserve chairman is set to be grilled by lawmakers on inflation and interest rates.

The prospect of imminent and faster-than-expected interest-rate rises has convulsed financial markets this month. Betting on a rate increase as soon as March, investors have moved to sell bonds, driving up yields, which in turn has prompted volatile trading for stocks, particularly tech firms.

"There is more of a risk now that rate rises are going to coincide with falling growth and that is obviously a bad combination," said Altaf Kassam, head of investment strategy for State Street Global Advisors in Europe.

Investors are also gearing up for the start of earnings season this week. The reports will be particularly important for technology firms who will need to post strong growth to justify their rich valuations, said Mr. Kassam.

Results more broadly will need to be strong to support U.S. stocks, which are increasingly looking less attractive than their European counterparts, he added. "For the U.S. to keep its top-of-the-world stance it needs across the board earnings to come in strong."

Grocery chain Albertsons Companies is set to be among the first major firms to report earnings, ahead of the opening bell Tuesday. Reports later in the week will be dominated by financial firms, with BlackRock, Citigroup, JPMorgan Chase and Wells Fargo set to report Friday.

Overseas, the Stoxx Europe 600 rose 0.7%, led by gains for its tech sector. In Asia, stock markets were mostly lower.

Read Barrons.com: Why it Might Be Time to Buy the Stock Market Dip

Economic Insight:

Deutsche Bank expects inflation to peak in January, "indicating an inflation market view well aligned to the hawkish messaging from the Fed."

Deutsche said the "less virulent nature of Omicron...somewhat alleviates concerns over further deterioration in supply chain," with smoother global logistics potentially weakening prices.

It also noted that inflation data on Wednesday will be "the last print to benefit from a 'base effect' as December 2020 marks the final months with stagnant inflation rate before CPI embarked on the current trajectory of rapid growth."

All that means "limited scope for further widening of U.S. breakevens in the short run."

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UniCredit's leading indicator continues to signal meager growth in global trade. In December 2021, the global leading indicator by UniCredit increased slightly to minus 0.2 after a reading of minus 0.3 in the previous two months.

The latest reading is consistent with global trade rising by 1.5% annualized 3-months-on-3-months, compared with its long-term average growth of between 4% and 5%.

Global trade is bottoming out after moderately declining since summer 2021, with both the latest headline and subcomponents included in the indicator seeming to confirm this view, said UniCredit's chief German economist Andreas Rees.

"While further signs of a bottoming out have emerged recently, the spreading of Omicron still makes the stabilization fragile," Rees said.

Stocks to Watch:

Abercrombie & Fitch warned that sales for the holiday quarter will fall short of its previous estimate due to inventory delays and increased Covid-19 restrictions. The company predicted sales will be flat to down 2% compared with 2019 levels, having previously forecast sales would rise 3%-5%. The company said it also expects sales to rise 4%-6% compared with 2020.

CEO Fran Horowitz said after a strong start to the quarter, the company experienced an unexpected slide in inventory in key categories due to extended port and transportation delays, leaving the company unable to keep pace with demand and resulting in lost sales during the holiday period. She added that as inventory has started to trickle in following the holidays, sales have increased.

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Vaccine revenues in 2022 will be supported by booster shots as new Covid-19 variants spur breakthrough infections, said Fitch Solutions' Beau Noafshar.

The increase in demand for first and second shots and boosters will benefit manufacturers of mRNA vaccines in particular, he said. This will be another strong year for Pfizer-BioNTech and Moderna in revenue terms as production is ramped up.

"Some of the weaker technologies, which haven't held up so well in terms of variants, aren't going to see this same maintaining of prices," said Noafshar. Prices are expected to fall across other vaccine technologies as supply rises and begins to outweigh demand toward the second half.

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Starbucks is on track to have two unionized stores in its Buffalo market after the National Labor Relations Board ruled in favor of the Starbucks Workers United union over the chain.

A NLRB spokeswoman said the union won the store location by a tally of 15 to nine after a review of results in a contested election last month. Starbucks can still appeal to the board for further review, she said. The Starbucks Workers United union represents one other Buffalo store following the December election.

Starbucks workers in a growing number of markets have also petitioned to unionize. The chain has said it views unions as interfering with its direct relationship with workers, but supports the election process.

Forex:

The dollar stalled in Europe against a basket of currencies, with the US Dollar Index remaining below the 96.00 level.

ING said the dollar has tracked a drop in the 10-year Treasury yield after it stalled around the 1.80% level, but testimony in the Senate later by Jerome Powell could help the currency rebound.

An acknowledgement by Powell that faster interest-rate rises are needed "could be enough to offer more support to the dollar...as investors cement expectations around 100bp of tightening in 2022." ING expects any dips in the dollar to be short-lived as the prospect of rate rises "continues to offer a very positive undercurrent."

Powell's remarks come ahead of what may be the highest U.S. CPI reading since the early 1980s on Wednesday, said DBS. Overall, the USD Index and the euro are still consolidating in the same ranges seen over the past month, DBS added.

JPMorgan said: "While the current surge in Omicron cases will have real near-term effects on economic outcomes, the principal driver of the macro backdrop and our FX views remains the increasingly hawkish Fed."

The FOMC minutes "underscored Fed hawkishness as a durable macro theme by bringing quantitative tightening into the policy mix and in doing so defied suggestions that U.S. monetary tightening might have been fully or over-priced in the dollar."

In the medium term, early and swift unwinding of Fed quantitative easing could imply up to around 4% further upside on the broad dollar, JPMorgan said.

JPMorgan CEO Jamie Dimon thinks the Fed is likely to increase interest rates by more than 100 basis points next year. Fed officials have signaled they expect three 25 basis-point increases in 2022.

Dimon, speaking on CNBC, suggested there would be more because he believes consumers and businesses are healthy enough to handle it and inflation would be higher than estimates.

"I'd personally be surprised if it's just four increases next year. It's a very, very little amount and very easy for the economy to absorb." Dimon hopes Omicron may help end the crisis stage of the Covid-19 pandemic: "If that's true, we may have a very, very good spring."

Bonds:

Treasury yields edged down in Europe after they mostly added to their recent gains on Monday, with the 2-year and 10-year maturities establishing fresh 52-week highs.

"Look for another upward ratchet if December core CPI arrives higher than 5% on Wednesday," wrote Jim Vogel, executive vice president at FHN Financial, in a Monday research note.

"Two things to consider before revising economic and market thinking for the entire year: First, 2022 headlines are incremental and not pivotal. The pivot was six weeks ago. Second, last week's flows pushed yields 20-25bp higher without the volume that accompanies a major turn."

Scarred by events in late 2019 and into the start of the coronavirus pandemic in early 2020, the Fed has since taken action to help shore up bond markets and ensure access to liquidity. But there could still be problems, said Lorie Logan, who leads implementation of monetary policy at the New York Fed.

"These repo facilities alone won't prevent all types of pressures on the Treasury market to the extent that limits on intermediation capacity or sales of Treasury securities are happening for factors other than the need for temporary liquidity," she said on the Macro Musings podcast, adding "repo won't fully substitute for outright sales of securities, but they can meaningfully I think limit the potential for disruptions."

Logan also said Fed asset purchases are an effective tool to help the central bank achieve its policy goals. These purchases work by lowering yields throughout credit markets, and they send a signal about the central bank's commitment to easy policy.

"Our assessment is that [asset purchases] been very effective at easing financial conditions and generally supporting the recovery." And on the tapering of the purchases, Logan said "I think this has gone well, and we haven't observed any challenges associated with the decline and purchase amounts."

Commodities:

Oil prices gained more than 1% in Europe as risk assets rebounded following volatile trading on Monday and as supply remained constrained.

While major oil producers in OPEC have pledged to gradually increase supply, production has been lower than promised, something which is also supporting prices, noted ANZ.

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01-11-22 0553ET