Most markets took a nosedive yesterday. In particular in the US, where all three indices gave back more than 1%. All sectors were affected by this movement, resulting in declines of -1.56% for the S&P500, -1.81% for the Dow Jones and -1.27% for the Nasdaq. At the same time, there was a rush into bonds, an investment that is generally perceived as much safer than stocks.

Yesterday, a whole series of statistics in the United States was published, and it was all rather disappointing. For the month of December, retail sales contracted more than expected and so did industrial production. This is a sign that the economy is slowing down, in this case a little faster than forecasters were expecting.

In previous columns, I mentioned that often on markets bad news is good news, because it is what will eventually force the Fed to stop raising rates. So why is bad news now just bad news? 

Let's go back a little. Imagine that you are in a bull market and that the first bad news starts to fall, like end of 2021. At first nobody cares. When the bad news accumulates, it starts to tickle. But no one really cares. Then, when there's a lot of bad news: the riskiest bets evaporate. The excesses are beginning to be erased. Everyone turns to the Fed, which overreacts and start a non-investor-friendly process. Then comes the "we're all going down" phase. Panic. The phase of decline sets in. Good news becomes bad news because it forces the central bank to stay mean to equity markets, i.e. to practice an anti-business rate policy, to make the excesses disappear. As a result, bad news trumps good news. That's good news for investors, because it means the central bank is going to have to calm down a bit and the time when rates will stabilize and then fall is getting closer.

However, now bad news tends to be just bad news, because weak data can create deep imbalances and lead to even more problematic situations: marked recession, or even the ultimate dirty word: stagflation, i.e. a situation where the economy and the central bank are mired in a dynamic of sluggish growth with still excessive price evolutions.

To sum it all up, investors have enjoyed a strong start to the year, but they are not quite sure of the strength of their convictions. The Fed members who spoke yesterday continued to hammer home their tough talk about the need to keep raising rates, but their audience was clearly sparse. U.S. bond yields played a different tune: the yield on 10-year debt fell to 3.33%, a sign that this market no longer has much faith in the central bank's rhetoric, while continuing to believe that a recession is imminent. Two other important members of the Fed are scheduled to speak today: Lael Brainard and John Williams. Will they get more traction than their counterparts? Not sure, as investors seem to have made up their own minds, at the risk of going against the adage that one should never go against the US central bank.

 

Economic highlights of the day:

The December building permits, housing starts and weekly jobless claims are today's main indicators. All the agenda is here. 

The dollar is down 0.2% to EUR 0.9244 and is flat against the pound at GBP 0.8100. The ounce of gold is back towards USD 1917. Oil gained ground, with North Sea Brent crude at USD 85.48 per barrel and US WTI light crude at USD 80.19. The yield on 10-year US debt is down to 3.33%. Bitcoin is back below USD 21,000.

 

In corporate news:

* Procter & Gamble raised its annual sales target, expecting higher prices to help offset lower demand for its consumer products.

* Chesapeake Energy announced Wednesday that it will sell part of its South Texas operations to WildFire Energy, a private equity firm, for $1.43 billion in cash.

* Metals producer Alcoa was down 6% in pre-market trading after reporting a wider-than-expected quarterly loss and saying it expects lower alumina shipments this year.

 

Analyst recommendations:

  • MasterCard: CICC initiated coverage with a recommendation of outperform. PT rises 24% to $455.87.
  • McDonald's: Morgan Stanley adjusts PT to $305 from $285, maintains Overweight rating.
  • PulteGroup: Oppenheimer & Co initiated coverage with a recommendation of outperform. PT rises 26% from last price to $64.
  • Rightmove: Investec upgrades to buy from hold. PT up 12% to 625 pence.
  • TE Connectivity: Evercore ISI downgrades to inline from outperform. PT up 5.4% to $130.
  • Toll Brothers: Oppenheimer & Co initiated coverage with a recommendation of outperform. PT set to $71.
  • Visa: CICC initiated coverage with a recommendation of outperform. PT set to $267.79.
  • Wizz Air: Exane BNP Paribas upgrades from neutral to underperform with a target of GBp 2000.
  • WPP: Goldman Sachs upgrades from hold to buy targeting GBp 1158.