The U.S. economy is currently the overachiever in the global classroom, and that's making investors a bit jittery. It might sound counterintuitive, but financiers prefer a predictable environment where risks are manageable. When the economy is either struggling or thriving too much, it tends to create imbalances that can lead to crises. Right now, the U.S. economy is performing exceptionally well, raising concerns about potential overheating. The textbook solution to an overheating economy is to raise key interest rates to keep inflation in check.
Higher interest rates make borrowing more expensive, which dampens consumer and business spending, eventually slowing down the economy. The catch in 2025 is that U.S. interest rates are already elevated, and investors were banking on a gradual decline. However, those expectations are evaporating faster than a puddle in the sun. Bank of America now suggests that the Federal Reserve might not cut rates at all in 2025, and could even raise them. Goldman Sachs has trimmed its forecast from three rate cuts to two. Meanwhile, Citi is holding out for five cuts, but not before May. Traders are currently hedging their bets between one and two cuts. This uncertainty underscores the confusion in the market, which is precisely why equities took a hit at the start of 2025. In short, nobody really knows what's going to happen next, and that's making everyone a bit uneasy. The bond market has been whispering a cautionary tale for weeks now: the monetary landscape in the United States is shifting.
The yield on the 10-year US Treasury note is inching closer to the notable 5% threshold. For context, the bond market has been in a bear market for six years, marking one of the three largest bear markets in the past 240 years. Remember, when bond yields rise, prices fall, hence the term "bear market" when yields are on the upswing. This pressure stems from a macroeconomic trio: the rise of populism, the surge in public debt, and the inflationary policies of central banks, as highlighted by Bank of America in its weekly report. The ongoing increase in yields is exerting considerable pressure on risky assets, prompting investors to rethink their diversification strategies. This isn't merely about choosing between stocks and bonds; the ripple effects are reaching the "weak links" that could be destabilized by higher financing costs. As a result, countries like Brazil, the UK, and France are feeling the heat, with impacts on their currencies, borrowing costs, and even stock markets.
In the United States, investors are lamenting the decline of short-term interest rates. Wall Street indices faced a rough patch last week, with both major and minor players feeling the heat. The Russell 2000 small-cap index, often seen as a bellwether for Donald Trump's potential return to office, tumbled 8% over the past month. If upcoming US inflation figures continue to soar, investors may be in for an even more challenging period. The first hurdle arrives today with the New York Fed's one-year inflation indicator, setting the stage for Wednesday's release of December's price rise data.
This week marks the grand opening of earnings season, with Wall Street banks stepping into the spotlight. As tradition dictates, these financial titans are among the first to unveil their quarterly numbers. Keep your eyes peeled on Wednesday for reports from JPMorgan Chase, Wells Fargo, Goldman Sachs, BlackRock, and Citigroup. Across the pond, Compagnie Financière Richemont will take center stage on Thursday, a crucial moment for the luxury goods sector. On the economic front, the New York Fed's one-year inflation forecast kicks off the week on Monday, followed by the US December price increase data on Wednesday. These reports will be closely watched for clues about the economic landscape.
Meanwhile, in the Asia Pacific region, markets are having a rough morning. Despite China posting better-than-expected import-export figures, stocks are down. Hong Kong, Seoul, and Sydney each slipped about 1%, while Taipei took a 2% hit. India wasn't spared either, dropping 1.4%. Japan, however, is taking a breather with a public holiday. Over in Europe, markets are seeing red, and Wall Street futures aren't looking any rosier.
Today's economic highlights:
The New York Fed's one-year inflation forecast is today’s main indicator. The full calendar is here.
- Dollar: EUR 0.9806 GBP 0.8249
- Ounce of gold: USD 2667
- Brent crude: USD 80.31 WTI: USD 77.12
- 10-year US bond: 4.77
- Bitcoin: USD 91,000
In corporate news:
- EU conditionally approves Synopsys ' $35 billion takeover of Ansys.
- Firefighters are investigating whether Southern California Edison 's infrastructure started a brush fire that is still burning in the Los Angeles suburbs, SCE said Friday, adding that no decision has been made on the matter.
- Johnson & Johnson considering acquisition of Intra-Cellular Therapies, Bloomberg reported
- Meta and Amazon back diversity programs, Apple keeps it.
- The Hershey is expected to announce the departure of CEO Michele Buck, according to Semafor.
- Eli Lilly is about to acquire biotech Scorpion Therapeutics for $2.5 billion, according to the FT.
- KKR is considering the sale of UK-based Viridor, according to Bloomberg.
- Biogen to buy remaining shares in Sage Therapeutics for $442 million.
- Hewlett Packard Enterprise signs $1 billion contract to supply AI-optimized servers to X.
- Gilead and LEO Pharma join forces to develop programs to combat inflammatory diseases.
Today's main earnings reports: Servicetitan, KB Home...
Analyst recommendations:
- Caterpillar Inc.: Evercore ISI upgrades to in-line from underperform with a target price of USD 365.
- Constellation Brands, Inc.: Jefferies downgrades to hold from buy with a target price reduced from USD 310 to USD 201.
- Crown Castle Inc.: Barclays upgrades to overweight from equalweight with a target price reduced from USD 117 to USD 104.
- Crown Holdings, Inc.: Morgan Stanley upgrades to overweight from equal weight with a target price reduced from USD 109 to USD 105.
- Elf Beauty: Morgan Stanley upgrades to overweight from equal weight with a target price raised from USD 139 to USD 153.
- Etsy, Inc.: Jefferies upgrades to hold from underperform with a price target raised from USD 45 to USD 55.
- Instacart: Needham upgrades to buy from hold with a target price of USD 56.
- Kla Corporation: Needham upgrades to buy from hold with a target price of USD 750.
- Linde Plc: TD Cowen upgrades to buy from hold with a price target raised from USD 480 to USD 515.
- The Mosaic Company: Piper Sandler & Co upgrades to neutral from underweight with a target price raised from USD 26 to USD 30.
- Us Bancorp: Piper Sandler & Co upgrades to overweight from neutral with a target price of USD 58.
- Walt Disney Company (The): President Capital Management Corp downgrades to neutral from buy with a target price reduced from USD 130 to USD 115.
- Amazon.com, Inc.: Morgan Stanley maintains its overweight rating and raises the target price from USD 230 to USD 280.
- Applovin Corporation: Morgan Stanley maintains its market weight recommendation and raises the target price from 200 to USD 365.
- Coinbase Global, Inc.: Barclays maintains its equalweight recommendation and reduces the target price from 355 to USD 282.
- Constellation Energy Corporation: Mizuho Securities maintains a neutral recommendation with a price target raised from USD 235 to USD 307.
- Doordash, Inc.: Morgan Stanley maintains its overweight recommendation and raises the target price from USD 160 to USD 200.
- Lattice Semiconductor Corporation: TD Cowen maintains its buy recommendation and raises the target price from USD 50 to USD 65.
- Monolithic Power Systems, Inc.: TD Cowen maintains its buy recommendation and reduces the target price from USD 975 to USD 720.
- On Semiconductor Corporation: Needham maintains its buy recommendation and reduces the target price from USD 87 to USD 66.
- Reddit, Inc.: Jefferies maintains its buy recommendation and raises the target price from USD 175 to USD 215.
- Roblox Corporation: Jefferies maintains its hold recommendation with a price target raised from USD 52 to USD 66.
- United Airlines Holdings, Inc.: DBS Bank maintains its buy recommendation and raises the target price from USD 90 to USD 120.
- Lloyds Banking Group Plc: Autonomous Research upgrades to neutral from underperform with a target price raised from GBP 0.59 to GBP 0.63.
- Severn Trent Plc: Bernstein upgrades to outperform from market perform with a price target raised from GBX 2720 to GBX 3050.
- Wise Plc: New Street Research LLP downgrades to neutral from buy with a target price raised from GBP 9 to GBP 10.