Yesterday, Wall Street continued to rise after the Fed announced a 0.25% rate hike, the start of a series this year. This major change, intended to reduce the available liquidity amid soaring prices, caused no turmoil. It had been announced for so long that investors have had time to prepare for it. In the background, the conflict in Ukraine continues to create uncertainty about the economic situation, while oil prices have risen again after the International Energy Agency warned about the consequences of a ban on Russian production.

As central banks start to raise rates, the issue of government debt would resurface at some point. Central banks have been injecting money in the system for so long, and governments have recently unveiled multi-billion-dollar stimulus packages.

Of course, these policies have a cost. They are also one of the causes of rampant inflation across the world. "We are now faced with a significant debt overhang, both on the part of governments and the private sector," writes economist Joachim Klement. But the difference with 2008 is that the vulnerable actors are not banks and households, but private companies and governments. This makes it more difficult for central banks because if they raise interest rates too much, the vicious circle of recession is set in motion.

But there's some good news: "In my opinion, this debt overhang creates a glass ceiling for interest rates," Klement notes, because if central banks break through that glass ceiling, the economy will stagnate and the slowing economy will eventually force central banks to cut interest rates. The economist puts this ceiling at between 2% and 3% in the US and the UK, and probably a little lower in the Eurozone. He believes that there will be monetary tightening, but that the overall low interest rate environment will persist. To get rid of the debt overhang, you need low interest rates for long enough and zero or negative real interest rates for even longer. "If interest rates rise too fast, central banks kill growth. If real interest rates go too far above zero, they also kill growth. What we need is another decade in the same environment as we have had in the last decade," continues Klement, who sees little chance of central banks causing another financial crisis and therefore believes that the current environment will continue.

As I write this, Joe Biden is having a call with his Chinese counterpart Xi Jinping. U.S. intelligence has leaked its concerns about an alignment between China and Russia. It also suggested that Vladimir Putin is ready to raise the nuclear threat again if the situation escalates for his troops. In any case, the diplomatic situation has become more tense than the somewhat naïve hopes at the start of the week.

 

Economic highlights of the day:

In the US, February's leading indicators and last month's housing figures are on the agenda.

The dollar/euro pair is trading at EUR 0.9063. The ounce of gold is stabilizing at USD 1932. Oil is rallying with North Sea Brent crude at $106.96and U.S. light crude WTI at $103.89. US debt yields are up slightly to 2.17% over 10 years, while German debt offers a coupon of 0.38% over the same duration. Bitcoin is trading around USD 40,550.

 

On markets:

* Fedex - The logistics and express delivery group reported Thursday a lower-than-expected quarterly profit due to higher costs and the impact of the Omicron coronavirus outbreak. FedEx shares are down 3.1% in premarket trading and several analysts have lowered their price targets.

* Tesla - The automaker restarted production at its Shanghai plant on Friday after a two-day shutdown due to health restrictions amid the resurgence of the COVID-19 outbreak in China, sources close to the matter said. Tesla shares are down 0.8% in premarket trading.

* The Boeing Company, Delta Air Lines - The U.S. aircraft manufacturer is discussing with the airline a giant order for up to 100 737 MAX 10s, sources close to the matter told Reuters. Boeing shares gained 0.4 percent in premarket trading.

* Meta Platforms - The Australian competition authority filed a complaint against the parent company of Facebook, accusing it of allowing fraudulent advertisements to circulate on its platform, notably promoting investments via cryptocurrencies falsely recommended by celebrities.

* General Electric - The industrial conglomerate announced Thursday that its chief executive, Larry Culp, had agreed to cut his potential 2022 bonus from $15 million to $5 million after shareholders rejected the terms of his compensation plan in a nonbinding vote.

* Moderna - The company submitted a request to U.S. health officials Thursday night for approval of a second booster shot of its COVID-19 vaccine in adults.

* Gamestop - The video game distributor reported a fourth-quarter net loss Thursday due to higher procurement costs and increased expenses as it transitions to online shopping. The stock fell 8.3% in pre-market trading.

* Lucid - The electric vehicle maker is considering raising prices on its future models due to "strong inflationary pressures," Peter Rawlinson, the group's chief executive, told Reuters on Thursday.

 

Analyst recommendations:

  • Adobe: Citigroup adjusts price target to $455 from $611, maintains neutral rating
  • Dollar General: Wells Fargo Securities raised the target on Dollar General Corp. to $255 from $220. Maintains overweight rating.
  • Fedex: Wells Fargo adjusts price target to $277 from $314, reiterates overweight rating
  • Gamestop: Wedbush downgrades GameStop Corp. to $30 from $45. Maintains underperform rating.
  • Johnson Matthey: Jefferies upgrades from Underperform to Hold with a target of £2,100.
  • Nike: Telsey advisory adjusts price target to $165 from $190, keeps outperform rating
  • Performance Food: Deutsche Bank initiated coverage with a recommendation of buy. PT up 20% to $62.
  • Softcat: Berenberg upgrades from hold to buy targeting GBp 1900.
  • Staar Surgical: BTIG upgrades to buy from neutral. PT jumps 41% to $98.
  • Targa Resources: Mizuho Securities Co Ltd upgrades to buy from neutral. PT up 26% to $85.
  • Tractor Supply: Oppenheimer & Co upgrades to outperform from market perform. PT up 16% to $270.
  • Transunion: Goldman Sachs downgrades to neutral from buy, adjusts price target to $109 from $125
  • Trex Company: Berenberg Bank adjusts price target to $102 from $130, maintains buy rating
  • United Airlines: Exane BNP Paribas upgrades to neutral from underperform. PT down 8.3% to $38.