Stocks Rise Ahead of US CPI, Retailers Ride Inflation Wave but Vols are Problem

More gains for stocks with the FTSE 100 pushing on to 7,775, moving further towards breaking its May 2018 all-time high at 7,903, and the DAX in Frankfurt driving towards the 15,000 level. The Stoxx 600 hit its highest since April as traders see cooler US inflation as a boon to risk appetite. It was another solid day for Wall Street with the S&P 500 rising more than 1.2% and the Nasdaq up 1.75% - gains ahead of the CPI betraying optimism that inflation has peaked. Investors also think that stocks look relatively cheap – but only compared to the last few years when we had negative real rates. When compared to historic periods of inflation and positive real rates, stocks are still a little expensive on a relative basis.

So where next...? The US CPI is on tap at 13:30 (GMT), and this is going to be directional for the market. Further signs of easing will be taken as a positive. But the expectation for a sharp deceleration in inflation creates a relatively high bar for bulls.

US CPI Report Eyed

All eyes are on the US CPI inflation report due out later today. Inflation is set to rise 6.5% from a year ago, down from 7.1% in the prior month. Core is seen at 5.7%, compared with 6% the month before, and +0.3% month-on-month, compared with 0.2% in November. China’s CPI out this morning matched expectations at 1.8% y/y vs 1.6% prior while PPI came in higher than expected at 0.7% from 1.3% prior. Watch for a leak ahead of the US data – last month there was a big leap in trading volumes on the 10yr in the 60 seconds ahead of the release. EURUSD could jump to 1.10 if the CPI is weak…

ECB Sounding Hawkish; Euro Seen With Clear Run Higher

The call on the euro is to do with central bank divergence – the Fed slowing just as the ECB wakes up. Relative hawkishness from the ECB – as the Fed starts to slow the pace of hikes – is seen allowing the euro to make further runs higher against the dollar. Comments from a couple of ECB officials yesterday underlined where the governing council seems to sit...Governing Council member Holzmann said rates will have to rise “significantly further to reach levels that are sufficiently restrictive to ensure a timely return of inflation to target”, adding that core inflation has not yet peaked. Rehn echoed the view that rates will still need to rise “significantly”

Rising Retailers

Marks & Spencer (MKS) reported a decent rise in Christmas sales, with like-for-like sales in Food up 6.3%. Overall food sales rose more than 10% - closer to the kind of inflation level we should be expecting. Clothing and Home rose 8.6% to give total LFL +7.2% and net Group sales +9.9%. This was a solid performance from Marks and points to further progress in the turnaround.

Tesco (TSCO) also solid enough but still shy of where inflation is. UK & Ireland sales rose by 7.8% over Christmas, reflecting price rather than volume gain. Management also reconfirmed FY guidance for retail adjusted operating profit of between £2.4bn and £2.5bn; retail free cash flow of at least £1.8bn. In short, OK as consumers are generally still wearing higher prices, particularly for groceries over Christmas, and all of these headline revenue numbers are driven by higher pricing- but consumers are feeling the pinch and supermarkets are being forced by the conditions and by the German discounters to invest in price, which is hitting margins. Retailers like a gentle inflation dynamic but the current situation is more disruptive – they are handling the situation pretty well but consumers are starting to show signs of weakness.

Elsewhere in the Market...

Asos shares up 12% on the absence of a profit warning. Revenues declined 3% but investors were thankful there was not another warning on profits. Centrica has had 2022 full year adjusted earnings per share of above 30p. Cash generation has also been good, and we expect 2022 closing net cash to be above £1 billion. Shares +5%. Whitbread is +24% ahead of 2020 for Premier Inn, cites strong trading momentum and lack of competition leaving pricing strong. Germany remains key to growth and this looks promising. FTX has apparently recovered $5 billion of liquid assets, including cash, crypto, and securities. European house prices are set to fall, whilst the FCA warns that 750k households in the UK are at risk of mortgage default...highlighting the kind of problems faced by central banks in raising rates too far.

In the Charts Today

Cowen cuts Alphabet to $125 from $135 and Amazon to $140 from $160...meanwhile Barclays cuts Apple to $133 from $144. This is mainly just catch-up with market conditions – Amazon trades at $95. SPX – running into the 200-day line ahead of the CPI – directional positioning until the inflation report is out the way is tricky, but I see a break either side of this line depending on the data. Soft CPI could see 4,150 hit before the bears reassert themselves. A higher-than-expected print will cause serious damage with relatively weak hands at work – potential for 3,766 area, the Dec low.

Gold – golden cross confirmed, eyes on CPI but weaker inflation is –ve for gold esp if the Fed keeps at it.

Copper – running out of steam for now but 4.2 looks ripe for retest

GBPUSD – golden cross but MACD not saying much...still trending sideways but looking for break in the dollar’s fortunes rather than seeing much on the sterling side to ignite.