Stocks try to hold bullish stance after Wall Street snaps two-day win streak.

A Cautiously Optimistic Start  

European stock markets made tentative gains on Tuesday morning after a positive handover from Asia despite Wall Street snapping a two-day bounce following last week’s inflation reading. The DAX, by some measures, re-entered a bull market after rallying 20% off its YTD lows from September…Infineon with a big upgrade today. Is the worst over? I doubt it, but more below. 

 Sterling jumped higher against the dollar at the European open but is yet to recapture the Friday highs at 1.1850, whilst the euro kicked on to a new four-and-a-half month high at 1.04. Gold also pushed to new three-month highs as the dollar and US Treasury yields remain pressured. Bitcoin still under $17k…FTX says could have one million creditors…this is going to get a whole lot worse still. Oil down with OPEC cutting demand outlook for this year – the fifth time since April - also IEA cutting ’23 demand outlook a touch even though supply also seen falling, stockpiles warning with levels at 18-year lows. 

 Hong Kong leads Asian markets higher 

Biden talked to Xi on the sidelines of the G20 and said there was no need for a new cold war. Most G20 leaders' members strongly condemned the war in Ukraine. “The use or threat of use of nuclear weapons is inadmissible. The peaceful resolution of conflicts, efforts to address crises, as well as diplomacy and dialogue, are vital. Today’s era must not be of war,” they said. Reassuring stuff I suppose, but whoever says, ‘I favour war’. Everyone says they hate war right up until it becomes a total necessary continuation of diplomacy by other means.  

Japan’s economy unexpectedly shrunk due to the weaker yen, whilst China data disappointed with industrial output up 5.0% vs 5.2% expected and 6.3% prior. Retail sales fell 0.5% against an expected rise of 1.0% and +2.5% prior; the first decline since May. Property investment declined 16%, underling weakness in the sector, whilst exports also contracted. GS cuts Q4 China growth forecast in half. PBOC kept key policy rate unchanged. Tech stocks led Hong Kong higher with the likes of Tencent and Alibaba up double-digit percentages after Chinese online sales improved. The Hang Seng added another 4% and is now up 25% from its October low.  

Up, Up and Away! Inflation Continues to Haunt Policy Makers 

Was the inflation reading last week the end of the beginning? Is the worst over for stock markets? Fed’s Brainard said: “I think it will probably be appropriate soon to move to a slower pace of rate increases … We are highly cognisant that in a world where many central banks in large jurisdictions are tightening at the same time, that is greater than the sum of its parts”. Remember this comes after Waller told everyone to quit thinking about the pace slowing and think about what the destination will be. I still think there is one more major flush whenever the current bear market rally fizzles. Yesterday’s close for the S&P 500 was not constructive. 

 Somewhat against consensus for higher for longer, Goldman Sachs expects a "significant" decline in US inflation in 2023 due to easing in supply chain constraints, shelter inflation peaking and slower wage growth. The argument seems to be that goods inflation is fading fast even if services inflation will remain high and sticky. Everyone has been calling peak inflation – the transitory angle- forever. I don’t really care if it’s peaked if it’s about to plateau and remain elevated for a long while.  

UK Wrestles with Labour Dissatisfaction  

UK labour market data out this morning shows unemployment still really low, down 0.2 percentage points to 3.6%. But the economic inactivity rate rose the same amount to 21.6%...no one wants to work!! Wages are up 6% - the strongest rate of pay increase outside of the pandemic era. It’s not exactly a wage price spiral but it’s hardly coming down with rate hikes. 

 In London, City landlord Land Securities reported a loss on falling property values – BoE rate hikes kicking in? BAE Systems rose 3% after it reported strong orderbook and signalled more orders are coming as defence spending rises. Question mark over what the Chancellor says this week about cutting real terms defence budget here but overall, the market seems to be supportive globally. Vodafone shares fell 5% after reporting weaker growth in Germany.   

 What to expect next 

Later today – Empire State manufacturing index and US producer prices. FOMC speakers include Cook and Barr as we probably get more commentary about what the Fed thinks in the wake of the inflation reading.