Daily All Time High In Peril As Futures Dip After Intel Tumbles

After hitting a record high for 5 consecutive days, the daily tech-led meltup is in peril after Intel reported solid earnings but disappointed consensus with weak guidance, sending the stock tumbling 11%, and putting pressure on the Nasdaq which is down 0.2% as disappointing guidance from KLA also hit semiconductor stocks; AMD and Nvidia also retreated. S&P futures are also lower on the day, if well above session lows, while Europe is higher 1% to a 2 year-high led by luxury stocks after LVMH gave reassuring results. Asian stocks closed lower, snapping a six-day win streak, as tech shares stumbled and the China rally halted amid some skepticism over the impact of market rescue measures. 10Y yields inched modestly higher, rising 2bps to 4.12% after earlier falling below 4.10%. The US dollar dropped, also reversing an earlier move in the opposite direction. Oil dipped after surging on Thursday and bitcoin recovered recent losses, trading above $41000.

In premarket trading, Intel tumbled after providing a disappointing forecast, renewing doubts about a long-promised turnaround at the once-dominant chipmaker. Intel’s first-quarter projection for both sales and profit came in well short of Wall Street estimates, with analysts calling into question its ability to compete with competitors capitalizing on the AI boost. The results suggest Intel is struggling to defend its position in data center chips as demand weakens and it continues to lag behind chipmaking peers like Nvidia. Intel’s shares fell more than 12% in premarket trading, and if the decline in early trading holds, the company will be set for its biggest fall since October 2021. European semi-conductor stocks dropped after the update and after disappointing results from KLA. Here are some other notable premarket movers:

• Archer-Daniels-Midland shares fall 2.4% after UBS cut its recommendation on the food processing and commodities trading corporation’s stock to neutral from buy, citing lower growth and margins.
• KLA Corporation shares fall 7.5% after the semiconductor equipment maker provided guidance for third-quarter adjusted earnings per share and revenue that fell short of estimates at the midpoint.
• Snap shares rise 2.6% after Deutsche Bank upgrades its rating on the social media company to buy in a sector note on the online advertising outlook for the fourth quarter.
• T-Mobile shares decline 3.2% after the telecommunications company reported fourth-quarter earnings per share that missed estimates. Despite the praise for a strong quarter, analysts noted that share buybacks did not meet their expectations and that churn was greater than anticipated.
• Visa shares fall 3.2%, with analysts saying that while the payments firm’s fiscal first-quarter was robust, there may be some disappointment that volumes in January could be affected by adverse weather. They also cite guidance for higher opex as a potential concern, especially after the shares closed at a record on Thursday.

Despite Friday’s setback for the Nasdaq, optimism is running high on equities. Investors channeled $17.6 billion into global equity funds in the week through Jan. 24, BofA strategists said while US equity funds took in $5.3 billion. Gains are being fed by strong earnings and conviction the Federal Reserve and European Central Bank are gearing up to cut rates.

Vincent Juvyns, global market strategist at JPMorgan Asset Management, noted funds that started the year with big cash positions have been under pressure to buy stocks.    

“Markets are now comfortable with the idea of a soft landing,” Juvyns said. “Central banks have confirmed that interest rate cuts would come rather later than was first expected, but that message has now been digested by the market.”

The view of a soft landing for the US economy was confirmed by Thursday’s gross domestic product data. Investors will get another key reading of US pricing pressures later Friday, with the release of the core personal consumption expenditures index, the Fed’s preferred gauge of underlying inflation.

“There was something for everyone in yesterday’s data. The soft landing scenario looks good for earnings, but it also looks like the Fed is succeeding in bringing inflation down, which has benefits for bonds too,” said Sarah Hewin, head of Europe and Americas research at Standard Chartered Bank.

The core PCE deflator — the Fed’s preferred inflation measure — likely grew at a subdued pace in December, according to Bloomberg Economics. “The personal income and outlays data may be a “Goldilocks” report — showing robust consumption and income even with inflation more than half way to the Fed’s target”

Europeans stocks are set to rise for a third day, while bonds in the region add to their post-ECB rally. The Stoxx 600 is up 1%, hitting the highest level in two years as luxury stocks rally after LVMH gave a reassuring set of results, bucking weakness in US equity futures and Asian markets. LVMH shares jumped 9.1%, the most since March 2022, adding just shy of €29 billion ($31.5 billion) of extra market value. LVMH’s fourth-quarter sales were boosted by high-end shoppers splashing out on its Dior fashions, Louis Vuitton handbags and Moët & Chandon Champagne. The strong performance follows a similarly upbeat report from Cartier owner Richemont, suggesting the strongest brands are weathering the broader slowdown in the luxury sector. The results come as LVMH’s French billionaire owner Bernard Arnault plans to appoint two of his sons to the board of the luxury conglomerate, underscoring the family’s firm grip on the company. Here are the other notable premarket movers:

• Shares in Sartorius surge as much as 12%, the most since March 2021, after the German laboratory equipment supplier reported a book-to-bill ratio in the fourth quarter that impressed analysts. The outlook for the year is also positive, according to those covering the stock.
• Shares in Remy gain as much as 17% after the cognac maker reported third-quarter results. Both Morgan Stanley and Jefferies see the results providing some relief, while Citi says the absence of new negatives on the FY25 outlook should enable investors to start looking forward.
• Shares in Salvatore Ferragamo rise as much as 5.9%, reversing earlier declines, as analysts said results from the Italian luxury accessories maker were slightly above expectations, though noted that this was driven by the firm’s lower quality wholesale channel. Overall, luxury stocks got a boost from a resilient set of results from LVMH.
• Shares in Lonza soar as much as 15%, their steepest gain ever, after the Swiss maker of drug ingredients named former Unilever CFO Jean-Marc Huet as its new chairman, and posted a confirmed outlook for 2024-2028, which analysts said was welcome.
• Shares in JCDecaux rise as much as 8.9% after the outdoor advertising firm reported stronger-than-expected organic sales growth during the fourth quarter. Growth was driven by digital revenue during the year-end period and a recovery of transport activities, the company said.
• Shares in Merck KGaA advance as much as 6.8%, the most since July 2022. Results from ASML, TSMC, Lonza, and Sartorius provide a reassuring readacross for the German pharmaceutical company, according to Citi.
• Shares in Europe Chip Stocks fall across the board after once-dominant chipmaker Intel gave a first-quarter forecast that was much weaker than expected.
• Shares in Volvo slide as much as 5.8%, before paring the decline, after the Swedish truckmaker missed expectations on quarterly order intake. Guidance for a slower 2024 also weighs on sentiment.
• Shares in Bayer fall as much as 2.9% after being downgraded to underperform from neutral at Bank of America. The broker advises caution on the German conglomerate due to continued overhang from litigation, a cut dividend and an “unclear path” to deleverage.

Earlier in the session, Chinese and Hong Kong shares dropped after the biggest three-day rally since 2022, shrugging off fresh stimulus signals from Beijing. However, Bank of America highlighted a record $12.1 billion of inflow into Chinese equity funds, a possible sign investors are tiptoeing back into the beaten-up market. The MSCI Asia Pacific Index fell as much as 0.5%, with Toyota, Alibaba and Tencent among the biggest drags on the benchmark. Chip and PC stocks fell after a disappointing outlook from Intel. Still, the regional benchmark was poised for a weekly advance of 1.5%, its best so far this year. Chinese equities retreated after notching their biggest three-day advance since 2022 on bets that the latest efforts from Beijing will support the economy and backstop markets. Investors are now trying to gauge how long those gains might be sustained.

In FX, the Bloomberg Dollar Spot Index falls 0.2% and is flat for the week while the Swiss franc tops the G-10 FX pile, rising 0.4% versus the greenback.  Treasury 10-year yields dropped two basis points to 4.10%, extending Thursday’s six-basis-point decline. "While additional short-term USD gains are possible as the market reprices Fed expectations, most of the technical backdrops favor using such rallies as a selling opportunity,” George Davis, chief technical strategist at RBC Capital Markets, writes in a note

In rates, treasuries are mixed with the yield curve flatter as US trading day begins, unwinding a portion of Thursday’s sharp steepening in 2s10s and 5s30s spreads ahead of a key inflation reading for December. US long-end yields are flat; 10-year yields around 4.12% with bunds outperforming and gilts lagging slightly. Front-end underperformance flattens 2s10s by ~2bp, 5s30s by ~1bp on the day. Dollar issuance slate empty so far; five names priced $4.65b Thursday. German bunds extended a rally that was sparked on Thursday, when President Christine Lagarde’s gave a muted affirmation that the ECB may begin lowering interest rates from around mid-2024. Bunds rose despite a generally hawkish tone from ECB policymakers - Governing Council member Boris Vujcic argued they did not turn dovish on Thursday; the German front-end extends outperformance since Wednesday’s ECB meeting.

In commodities, oil prices decline, with WTI falling 1% to trade near $76.55. Spot gold rises 0.1%.

To the day ahead now, and data releases from the US include the PCE inflation data for December, along with personal income and personal spending, and pending home sales. Meanwhile in the Euro Area, we’ll get the M3 money supply for December. From central banks, we’ll hear from the ECB’s Panetta, Kazaks and Vujcic. Finally, earnings releases include American Express.

Market Snapshot

• S&P 500 futures down 0.3% to 4,907.75
• MXAP down 0.8% to 165.16
• STOXX Europe 600 up 0.7% to 482.02
• German 10Y yield down 2.5 bps at 2.26%
• Euro little changed at $1.0843
• MXAPJ down 0.4% to 506.20
• Nikkei down 1.3% to 35,751.07
• Topix down 1.4% to 2,497.65
• Hang Seng Index down 1.6% to 15,952.23
• Shanghai Composite up 0.1% to 2,910.22
• Sensex down 0.5% to 70,700.67
• Australia S&P/ASX 200 up 0.5% to 7,555.36
• Kospi up 0.3% to 2,478.56
• Brent Futures down 0.7% to $81.85/bbl
• Gold spot down 0.0% to $2,020.06
• US Dollar Index little changed at 103.50

Top Overnight News

• European stocks rose on Friday, bucking weakness in US equity futures and in Asian markets, as an update from the world’s largest luxury retailer showed that spending among the wealthiest consumers remains resilient.
• China’s central bank unveiled broad plans to guide money into sectors of national importance to boost the faltering economy this year, after making an unusual reserve requirement ratio announcement.
• Vladimir Putin is testing the waters on whether the US is ready to engage in talks for ending Russia’s war in Ukraine.
• European Central Bank Governing Council member Gediminas Simkus said that while he’s less optimistic than markets on the prospect of an April reduction in interest rates, he’s open-minded and will look at the data that arrives in the meantime.

A more detailed look at global markets courtesy of Newsquawk

Asia=Pac stocks failed to sustain the broad positive momentum from Wall St with the region mostly lower in quietened conditions amid a lack of fresh drivers and as markets in Australia and India were closed for holiday. Nikkei 225 was pressured and retreated beneath the 36,000 level despite softer-than-expected Tokyo inflation data which showed the slowest pace of core inflation in Japan's capital area since March 2022. Hang Seng and Shanghai Comp were choppy as the effects of recent Chinese support measures waned.

Top Asian News

• Chinese Commerce Minister said China's trade faces a more complex and severe external situation, while the rise of trade protectionism, intensification of geopolitical conflicts and the risk of spillover has increased significantly, according to Reuters.
• BoJ Minutes from the December 18th-19th meeting stated that members agreed they must patiently maintain easy policy and must confirm a positive wage-inflation cycle to consider ending negative rates and YCC. Furthermore, a few members said the decision on whether a positive wage-inflation cycle is in place must be made comprehensively and not by looking at particular data, while a few members said they don't see the risk of the BoJ being behind the curve and can wait for developments in the spring annual wage talks.Members also agreed they must continue deepening the debate on exit timing and the appropriate pace of hiking rates after the end of negative rates.

European bourses are in the green, Stoxx600 (+0.6%); with the CAC 40 (+1.7%) outperforming alongside significant strength in the Luxury sector, post-LVMH earnings coupled with Barclays upgrading the sector to Overweight. European sectors hold a strong positive tilt; Consumer Products & Services sits highest after strong LVMH earnings, with Food Beverage and Tobacco also propped up post-Remy Cointreau results. Tech lags after weaker Intel guidance. US equity futures are on a mixed footing, with the NQ (-0.5%) significantly underperforming as Tech drags the index lower post-Intel earnings after-hours; Co. shares are seen lower by 11% in the pre-market after guiding Q1 revenue to be significantly lower than expectations.

Top European News

• ECB Survey of Professional Forecasters: 2024 inflation seen at 2.4% vs. prev. view of 2.7%. 2025 2.0% vs. prev. view of 2.1%. GDP: 2024 0.6% vs. prev. view of 0.9%. 2025 1.3% vs. prev. view of 1.5%. Core inflation: 2024 2.6% vs. prev. view of 2.9%.
• ECB Bulletin: Contacts painted a largely unchanged picture of activity stagnating or contracting slightly in the fourth quarter of 2023, with little or no pick-up expected in the first quarter of 2024. Wage growth is expected to ease somewhat this year.
• Maersk (MAERSKB DC) MECL vessels will now also be avoiding the Red Sea region

ECB speak

• ECB's Kazaks says the ECB is data, not date, dependent, via Bloomberg TV; sees some softening in the labour market. Technical recession is a possibility.
• ECB's Muller says it is still too soon to talk about rate cuts. Too little confidence now that inflation has been defeated.
• ECB's Vujcic says there was no dovish tilt at the January ECB meeting; we are data dependent not date dependent, via Bloomberg. We need patience and must have sufficient data; need reassurance that inflation is headed for 2%.
• ECB's Simkus says does not expect a rate cut in March. The further into 2024, the more likely a rate cut becomes; expectations increases exponentially not linearly.

Earnings

• Intel Corp (INTC) - Q4 2023 (USD): EPS 0.63 (exp. 0.45), Revenue 15.4bln (exp. 15.16bln). Q1 adj. EPS view 0.13 (exp. 0.34).Q1 adj. revenue view 12.2-13.2bln (exp. 14.25bln). REVENUE BREAKDOWN: Client Computing 8.84bln (exp. 8.42bln). Datacenter & AI 4bln (exp. 4.08bln). Network & Edge 1.47bln (exp. 1.55bln). Mobileye 637mln (exp. 627.2mln). Intel Foundry Services 291mln (exp. 342.5mln). KEY METRICS: Adj. operating income 2.58bln (exp. 2.1bln). Adj. operating margin 16.7% (exp. 13.9%). Adj. gross margin 48.8% (exp. 46.5%). R&D expenses 3.99bln (exp. 3.9bln). COMMENTARY: On track to meet the goal of five nodes in four years. (Newswires) Shares -11.3% pre-market
• T-Mobile US Inc (TMUS) - Q4 2023 (USD): EPS 1.67 (exp. 1.90), Revenue 20.48bln (exp. 19.64bln). (Newswires) Shares -2.8% pre-market
• Visa Inc (V) - Q1 2024 (USD): Adj. EPS 2.41 (exp. 2.34), Revenue 8.6bln (exp. 8.54bln). Guides Q2 net revenue growth to upper mid-to-high single-digit (exp. +8.67%). Q2 EPS growth high teens (exp. +12.15%). KEY METRICS: Payments volume at constant currency +8% (exp +8.03%). Cross-border volumes at constant currency +16% (exp. +14.9%). Total Visa processed transactions 57.5bln (exp. 57.77bln). Shares -3.1% pre-market
• LVMH (MC FP) - FY 2023 (EUR): Revenue 86.153bln (exp. 85.626bln); FCF 8.104bln, -20%; Net Income 15.174bln, +8%; Is confident in continued growth in 2024. Q4 RESULTS: Revenue 23.95bln (exp. 23.72bln). Organic revenue +10% (exp. +8.17%). Fashion & Leather Goods organic sales +9% (exp. +9.14%). Wines & Spirits organic sales +4% (exp. -7.47%). Perfumes & Cosmetics organic sales +10% (exp. +9.41%). Watches & Jewelry organic sales +3% (exp. +2.93%). Selective Retailing organic sales +21% (exp. +14%). FY23 OPERATING INCOME: Recurring 22.80B (exp. 22.46bln). Fashion & Leather Goods 16.84bln (exp. 16.9bln). Wines & Spirits 2.11bln (exp. 1.85bln). Perfume & Cosmetics 713mln (exp. 769mln). Watches & Jewelry 2.16bln (exp. 2.02bln). Selective Retailing 1.39bln (exp. 1.51bln). FY23 REVENUE BREAKDOWN: Revenue 86.15bln (exp. 85.88bln). Fashion & Leather Goods 42.17bln (exp. 42.47bln). Wines & Spirits 6.60bln (exp. 6.46bln). Perfume & Cosmetics 8.27bln (exp. 8.3bln). Watches & Jewelry 10.90bln (exp. 10.97bln). Selective Retailing 17.89bln (exp. 17.61bln). Dividend per share 13 (exp. 13.59). Net income 15.17bln (exp. 15.67bln). CEO Arnault does not intend to leave in the near or medium term. CFO says sales trends with Chinese clientele remained good; doesn't expect Chinese groups to return soon to Europe but managing to make 'significant' business with wealthy Chinese in Europe. CEO says Co. is definitely not considering an asset spin-off, it would be a mistake. Co. not planning additional price hikes this year. (LVMH) Co. holds a 6.5% weighting in the Eurostoxx50; 12% in the CAC40; fifth largest in the Stoxx600 Shares +11.5% in European trade
• Remy Cointreau (RCO FP) - Q3 (EUR): Revenue 319.9mln (exp. 320.7mln), Notes major destocking in China ahead of Chinese New Year. Cooperating with the Chinese authorities in anti-dumping investigation. Cuts FY23/24 Organic Revenue guidance to "lower end" -20% to -15% (prev. guidance -20% to -15%). Cognac +31.4% Y/Y, Liqueurs +1.5%, Partner Brands -7.3% Y/Y, Group Brands -22.9% Y/Y. (Newswires) Shares +15.2% in European trade
• Sartorius (SRT GY) - FY23 (EUR): Net 339mln (exp. 655mln Y/Y), EBITDA 963mln (exp. 961mln), Revenue 3.4bln (exp. 3.42bln), Orden intake 3.07bln, -21.5% Y/Y. Guides FY24 Revenue in the "mid to high single digit % range". Expects profitable growth in 2024. (Newswires) Shares +8.4% in European trade

FX

• DXY is around flat, though initially picked up in the European morning to 103.73 before fading the move in quiet trade as markets await US PCE data; currently holds below the 103.50 mark.
• EUR is largely moving at the whim of the USD and as ECB speakers push back on talk of rate cuts; still some way off yesterday's high of 1.0901.
• USD/JPY has continued to tick higher but the next move will likely come via Fed vs. BoJ divergence/convergence plays with PCE due later today and FOMC next week; currently holds around flat at 147.70.
• NZD suffering vs. the USD to a greater extent than AUD which is possibly being buoyed by sentiment around China post-RRR cut. AUD/NZD looking to test 1.08 to the upside as NZD/USD slips below 0.61.
• PBoC set USD/CNY mid-point at 7.1074 vs exp. 7.1733 (prev. 7.1044).

Fixed Income

• USTs are holding in the green, but only modestly so, with focus entirely on US PCE for December; USTs marginally bull-flattening into this.
• Bunds are contained around the top-end of Thursday's parameters, contracts printed an incremental WTD high of 135.02 this morning, before gradually waning.
• Gilt action has been in-fitting with EGBs, though did not print a fresh WTD peak on the open with the 98.78 current high markedly shy of Monday's 99.45 best, resistance thereafter limited until 100.00.

Coommodities

• Crude benchmarks are pulling back marginally, with specifics light and the complex thus far largely unaffected by USD action; Brent futures are back below USD 82.00/bbl.
• Spot gold is unchanged, in a narrow USD 2018.34-2024.22/oz bound with specifics light and the yellow metal thus far also unaffected by the USD; XAU holding just shy of USD 2025/oz; base metals are a touch softer echoing the tone of US equity futures with overall specifics light.
• US is pausing the pending decisions of new LNG export projects in order to review economic and environmental impacts; Pause comes with exceptions for unanticipated and immediate national security emergencies.

Geopolitics: Middle East

• Israeli war council discussed a possible exchange deal with Hamas, according to Sky News Arabia.
• Hamas said if the ICJ issues a ruling for a ceasefire, Hamas will abide by it if Israel reciprocates, while Hamas will release all Israeli hostages in Gaza if Israel releases all Palestinian prisoners.
• American weapons arrived in Israel including dozens of F-35 and F-15 fighters and Apache helicopters, according to Al Jazeera.
• US National Security Adviser Sullivan is to meet with Chinese Foreign Minister Wang Yi for talks on Houthi attacks in the Red Sea, according to WSJ. It was later reported that the White House confirmed National Security Adviser Sullivan will travel to Bangkok this week to meet with Thailand's PM and will also meet with Chinese Foreign Minister Wang, according to Reuters.
• Chinese officials asked their Iranian counterparts to help rein in attacks on ships in the Red Sea by the Iran-backed Houthis, or risk harming business relations with Beijing, according to Iranian sources and a diplomat familiar with the matter cited by Reuters.
• US and Iraq are to shift to bilateral military relations and US officials will stay in Iraq to defeat Islamic State, according to Bloomberg.
• US President Biden last week pressed Israeli Prime Minister Benjamin Netanyahu to scale down the Israeli military operation in Gaza, two U.S. officials told Axios.

Geopolitics: Other

• Kremlin denies Bloomberg reports that Putin is "putting our feelers" to the the US over terms for ending the Ukraine war.
• Russian President Putin is reportedly to signal to the US that he's open to talks on Ukraine and sources added that Moscow is floating ideas on Ukraine security and territory, according to Bloomberg.
• US officials said North Korean leader Kim could take some form of lethal military action against South Korea in the coming months after switching to a policy of open hostility, according to the New York Times.
• Venezuelan President Maduro says the deal with the political opposition for elections this year could collapse after he alleged "conspiracies" against him, according to Reuters.

US Event Calendar

• 08:30: Dec. Personal Income, est. 0.3%, prior 0.4%
  • Dec. Personal Spending, est. 0.5%, prior 0.2%
  • Dec. Real Personal Spending, est. 0.3%, prior 0.3%
• 08:30: Dec. PCE Deflator MoM, est. 0.2%, prior -0.1%
  • PCE Deflator YoY, est. 2.6%, prior 2.6%
  • PCE Core Deflator MoM, est. 0.2%, prior 0.1%
  • PCE Core Deflator YoY, est. 3.0%, prior 3.2%
• 10:00: Dec. Pending Home Sales YoY, est. -4.3%, prior -5.1%
• 10:00: Dec. Pending Home Sales (MoM), est. 2.0%, prior 0%
• 11:00: Jan. Kansas City Fed Services Activity, prior -10

DB's Jim Reid concludes the overnight wrap

As it's Oscar nomination week we decided to watch the 3 hour long "Oppenheimer" over two nights this week. I fell asleep on the sofa during the first half on Tuesday night and then again last night for the final part (it was football on Wednesday when I was wide awake!). My wife kept on poking me but I refused to stir. Assuming this eventually wins the Oscars my quick review of the last 5 Oscar winning films are as follows. "Oppenheimer" - a bit dull. "Everything everywhere all at once" - one of the worst films I've ever seen. "CODA" - a fabulous film. "Nomadland" - not a barrel of laughs. "Parasite" - a very good movie. I suspect if the EMR comes to an end I won't end up a very successful movie critic.

The market script has stayed the same over the last 24 hours, with the S&P 500 (+0.53%) closing at a record high for a 5th consecutive session, whilst US IG spreads again fell to their tightest level in over two years. Several factors drove the rally, including an upside surprise in US GDP for Q4, which added to hopes that the economy could pull off a soft landing. Then shortly after, ECB President Lagarde struck a more dovish tone than expected, which led investors to dial up the chance of a rate cut as soon as April. So with hopes for a soft landing in the ascendancy, and yet more validation for near-term rate cuts, there was a significant cross-asset rally that saw equities and bonds post gains on both sides of the Atlantic. Next stop will be PCE inflation data out today as part of the US spending and income release. That will be important ahead of the Fed next week.

In terms of the ECB’s decision, the Governing Council left rates on hold as expected, and the statement repeated its language from December that “future decisions will ensure that its policy rates will be set at sufficiently restrictive levels for as long as necessary.” In the press conference, President Lagarde said that the consensus “was that it was premature to discuss rate cuts” and that they “need to be further along in the disinflation process before we can be sufficiently confident that inflation will actually hit the target in a timely manner.”

However, there were several dovish tweaks within the details of the ECB signal. The view of recent growth and inflation trends was toned down in the prepared statement, while Lagarde acknowledged the rise in headline inflation in December was smaller than the ECB had pencilled in. Lagarde also focused on data dependence and downplayed the need for the ECB to see any individual data point to begin easing, giving a sense that the ECB’s policy stance could shift promptly if the macro view changes. Our European economists see yesterday’s meeting as supporting their view of rate cuts starting in April, with room for this to begin with a 50bp cut if their more downbeat economic expectations fully materialise. See their full reaction note here.

Those dovish hints led investors to dial up the chance of rate cuts happening soon. For instance, going into the decision, the chance of a cut by April had stood at 63%, but by the close yesterday it was up to 93%. And a full 50bps of cuts are now priced in by the June meeting. The chance of a cut as soon as the next meeting in March also inched up to 17% by the close. So that’s still considered rather unlikely, but not impossible as far as markets are concerned.

Against that backdrop, sovereign bond yields rallied significantly across the Euro Area, with yields on 10yr bunds (-5.2bps), OATs (-6.1bps) and BTPs (-7.7bps) all falling significantly. And with rate cuts on the horizon, front-end yields saw an even larger decline, with 2yr German yields down -9.4bps. Next week will be very important on this front too, since we’ll get the flash CPI release for January, so any surprises could have an important bearing on the timing of rate cuts.

Apart from the ECB, the other big story came from US data, which continued to surprise on the upside. Specifically, t he first estimate of Q4 GDP came in at an annualised pace of +3.3% (vs. +2.0% expected), which was above every economist’s estimate on Bloomberg. And as part of that, we got confirmation that core PCE was running at +2.0% in Q4 as expected, so there was a lot of good news in the report. The only downside of note yesterday was that the initial jobless claims were above expectations over the week ending January 20, at 214k (vs. 200k expected), but even with that, the 4-week average still fell to its lowest in almost a year, at 202.25k.

With the print showing strong growth and inflation running at target levels again, that was great news for equities. Indeed, several indices hit new records, including the S&P 500 (+0.53%) and the DAX (+0.10%). That said, Tesla (-12.13%) lost significant ground, meaning that the Magnificent 7 fell back -0.82%, even though five of its members were actually higher on the day. Otherwise, the US equity rally was a broad one with 80% of S&P 500 constituents up on the day. And over in Europe, there was a significant divergence by country, with the STOXX 600 up +0.30%, but with losses for Italy’s FTSE MIB (-0.60%) and Spain’s IBEX 35 (-0.58%).

On the inflation front, yesterday’s data was fairly promising, but there were some more timely indicators that pointed in a more negative direction. For instance , Brent Crude (+2.99%) reached its highest level since November at $82.43/bbl, helped by the broader risk rally as well as latest data on US crude inventories, which fell to their lowest level since October (as of Jan 19). Separately, there was fresh evidence that the Houthi attacks on commercial shipping were having a broader impact, as Drewry’s World container Index was up for a 7th consecutive week. That’s now at $3,964 per 40ft container, which is nearly triple its levels from late-October, when costs were at a post-pandemic low.

But even as there were some more concerning headlines coming through, the dovish ECB and the core PCE data saw investors grow in confidence that the Fed would cuts rates. For example, the chance of a rate cut by the March meeting was up to 53%, and by the close there were 141bps of cuts priced in by the December meeting, up +8.9bps on the previous day. That meant Treasury yields fell across the curve, with the 10yr yield down -5.8bps to 4.12%, down from its high for 2024 the previous day. In addition, the larger decline in front-end yields meant the 2s10s curve steepened up to -17.9bps, which isn’t far away from its recent peak of -16.1bps in late October.

Overnight in Asia there’s been a more negative tone in markets, with losses for the Nikkei (-1.45%), the Hang Seng (-0.64%), the CSI 300 (-0.58%) and the Shanghai Comp (-0.24%). The main exception has been the KOSPI (+0.64%), but US equity futures are also negative, with those on the S&P 500 (-0.37%) and the NASDAQ 100 (-0.71%) pointing lower as well. On the data side, we also got the latest Tokyo CPI reading overnight, where headline CPI was down to +1.6% in January (vs. +2.0% expected), which is the first time that’s been beneath 2% since March 2022. In turn, that’s led investors to question how much the Bank of Japan will be able to hike rates this year, and yields on 10yr JGBs are down -3.0bps this morning.

To the day ahead now, and data releases from the US include the PCE inflation data for December, along with personal income and personal spending, and pending home sales. Meanwhile in the Euro Area, we’ll get the M3 money supply for December. From central banks, we’ll hear from the ECB’s Panetta, Kazaks and Vujcic. Finally, earnings releases include American Express.