Investors were dreaming of a more favorable outcome, but are not overly surprised by this reality check. They have to accept that the Fed will raise rates higher than they expected. Now imagine a scale ranging from "it's a party, rates are going to come down quickly" to "it's a mess, we're going to end up with double digit interest rates". Well, we're in the middle to two-thirds of the scale with a message like "it's not great, but we can still see the end of the tunnel". Powell’s comments have hit risky assets (i.e. notably stocks), strengthened the dollar, which in turn caused gold to fall. Bond yields are rising, with 10-year US debt back at 4%, while oil is falling on heightened fears of recession.

On a more technical level, the yield on 2-year U.S. debt soared to 5.08%, much faster than other maturities. This is a sign that the market has been assigning a higher probability to a recession since yesterday, with a spread above 1% compared to the 10-year, a first since 1981. Such a gap is rare. The economists whose work I have been reading since last night think that the 10-year rate should go back up to be a little more consistent with Jerome Powell's announcements and the takeoff of shorter maturities. They believe that investors are waiting for the next data to fully validate the evolution of the scenario: this could be the February US employment data to be announced on Friday.

Jerome Powell's more hawkish tone caused stocks to drop yesterday, quite logically: risk assets do not like high interest rates, which penalize economic activity and make access to liquidity more complicated. Real estate and tech stocks underperformed, since they are very rate-sensitive.  The S&P500 lost 1.5% and the Nasdaq 100 about 1.2%. In Europe, indices also fell, but more moderately. The contractions are quite modest considering the comments of Powell, who acknowledged in his bi-annual hearing before the US Senate yesterday that inflationary pressures have become stronger than the Fed expected at its last meeting. He also reopened the door to 50 basis point rate hikes when investors thought that time was over and that the central bank could quietly end its cycle with a few 25 basis point hikes.

All three Wall Street indexes were back in the green in pre-market trading. This shows that the equity investor still doesn't really believe in a recession (while, the bond investor does). Hence the importance of the next statistics, employment on Friday, and the first estimate of US inflation for February next week.

Today, Jerome Powell will perform the same exercise as the day before in front of the House of Representatives. There is little chance that the speech will be any different.

 

Economic highlights of the day:

German industrial production, the ADP employment survey and the JOLTS survey are on today’s agenda.

The dollar is unchanged at EUR 0.9488 and GBP 0.8455. The ounce of gold too, at 1812 dollars. Oil weakens, with North Sea Brent at USD 82.77 per barrel and US WTI light crude at USD 76.99. US 10-year debt yields rise back to 4%, with a 2-year soaring to 5.07%. Bitcoin is falling below USD 22,000.

 

In corporate news:

* Tesla fell 1.1 percent in premarket trading after Berenberg lowered its recommendation on the automaker to "hold" from "buy."

* Boeing is close to closing an order with Japan Airlines (JAL) for at least 20 737 MAX planes, Bloomberg reported Wednesday.

* Occidental Petroleum was up 2.5 percent in premarket trading after Warren Buffett's BERKSHIRE HATHAWAY increased its stake in the oil company to 22.2 percent.

* WeWork jumped 8 percent in premarket trading as the company held talks with investors to restructure more than $3 billion in outstanding debt and raise more cash, The New York Times reported Tuesday.

* General Electric will reduce its stake in aircraft lessor Aercap Holdings with the sale of 18 million shares, worth $1.12 billion, through its subsidiary GE Capital US Holdings. AerCap shares were down about 4% in after-hours trading.

* Ford Motor announced Wednesday a 40,000 yuan discount on its Mustang Mach-E electric SUVs in China until the end of April.

* Altria Group - Marlboro's parent company asked the Federal Trade Commission (FTC) on Tuesday to end litigation initiated in 2020 against it in connection with a $12.8 billion investment in Juul after its divestment last week from the electronic cigarette specialist.

* JetBlue CEO Robin Hayes strongly defended the company's proposed $3.8 billion acquisition of Spirit Airlines in an interview with Reuters, saying it will save passengers money, while the U.S. Department of Justice opposes the deal.

* American Airlines is ready to match the pilot compensation plan and profit-sharing scheme of competitor Delta Air Lines, CEO Robert Isom said Tuesday.

* Silvergate Capital was advancing 2 percent in premarket trading as U.S. regulators held talks with the cryptoasset specialist to allow it to continue operating, Bloomberg reported late Tuesday.

* Walmart - The subsidiary in Mexico and Central America of the U.S. group, Walmex announced Tuesday evening its intention to invest about 27 billion pesos in the region this year.

 

Analyst recommendations:

  • AGNC: J.P. Morgan upgrades to overweight from neutral. PT up 18% to $12.50.
  • Dick's Sporting Goods: Wells Fargo Securities upgrades to $146 from $120. Maintains equal-weight rating.
  • John Wood Group: Jefferies downgrades from buy to hold, targeting GBp 237.
  • Kingfisher: Barclays resumes monitoring at Overweight, targeting GBp 350.
  • Oracle: Berenberg maintained its Neutral recommendation. The target price is revised upwards from USD 82.50 to USD 72.00.
  • Tesco: Shore Capital upgrades from hold to buy.
  • Tesla: Berenberg downgrades to hold from buy. PT up 12% to $210.