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Why Stocks Dropped Last Week (And What It Means for Markets)

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What’s in Today’s Report:

  • Why Stocks Dropped Last Week
  • Weekly Market Preview:  A Key Earnings Week (Results Need to be Good)
  • Weekly Economic Cheat Sheet (Inflation in Focus Again this Week)

Futures are moderately lower on concerns about economic growth as COVID cases rose again in China while hopes for a diplomatic solution in Ukraine have all but faded.

China is continuing with its “zero COVID” policy and with cases rising again markets are fearing more shutdowns, perhaps in Beijing, which is a negative for global growth.

Russian President Putin essentially eliminated a diplomatic solution to the war, ensuring a further drawn-out conflict, which will also be a headwind on global growth.

Today there are no economic reports and no notable Fed speakers, but worries about global growth are the reason stocks dropped last week, so markets need some positive news on growth to stabilize in the near term.

On the earnings front, this is a very important week and while the most important reports don’t come out until later this week, two reports we’ll be watching today are KO ($0.58) and WHR ($4.90).

Have the Real Headwinds on Stocks Even Started Yet?

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What’s in Today’s Report:

  • Have the Real Headwinds on Stocks Even Started Yet?
  • Weekly Market Preview:  Is Economic Growth Stable?
  • Weekly Economic Cheat Sheet:  Jobs Report Friday

Futures are little changed following a quiet weekend of news as investors await key economic data later this week.

Geo-politically, in-person peace talks between Russia and Ukraine will resume on Tuesday in Turkey and there remains some cautious optimism for progress towards a cease-fire.

Economically there were no notable reports overnight, although Shanghai is entering a two-phased COVID lockdown that weighed on oil and Chinese shares overnight (as that’s negative for economic growth and oil demand).

Today there are no notable economic reports and no scheduled Fed speakers, so focus will remain on oil (do the early declines continue?) and geo-politics, as any more hints of a cease fire will put a tailwind on stocks.

What’s Driving Stocks

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What’s in Today’s Report:

  • What’s Driving Stocks
  • Natural Gas Update (New Highs Ahead?)

Futures are slightly higher following a generally quiet night of news as oil declined modestly and there was no further escalation in the Russia/Ukraine war.

Economic data disappointed overnight as UK Retail Sales missed estimates (-.3% vs. (E) 0.7%), while German IFO Business Expectations plunged to 85.1 vs. (E) 92.4, reflecting uncertainty related to the Russia/Ukraine war.

Today’s focus will be on the Consumer Sentiment Report (E: 59.7) and specifically the Inflation Expectations index, and if five-year inflation expectations move meaningfully above 3%, that will put a headwind on stocks.   Pending Home Sales (E: 0.9%) is the other notable report today, but it shouldn’t move markets.

From the Fed we have multiple speakers, including Williams (10:00 a.m. ET), Daly (11:00 a.m. ET), Barkin (11:30 a.m. ET) and Waller (12:00 p.m. ET) but as long as they stick to the current “script” of being open to a 50 bps hike at the May meeting (but not calling for even more) then they shouldn’t move markets.

Is the 10’s-2’s Spread Outdated?

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What’s in Today’s Report:

  • Is the 10’s-2’s Spread Outdated?
  • EIA Analysis and Oil Market Update (Prices Back Near the Recent Highs)

Futures are modestly higher following good economic data and as oil didn’t continue Wednesday’s rally (at least not overnight).

Economic data was solid as both the March EU Flash Composite PMI (54.5 vs. (E) 54.1.) and the UK Flash Composite PMI (59.7 vs. (E) 58.7) beat estimates, implying the Russia/Ukraine war wasn’t materially slowing growth.

Today focus will be on economic data, specifically the March Flash PMIs (E: 56.7).  With inflation still high and the Fed threatening a 50 bps hike in May, the PMIs need to give markets a “goldilocks” number to extend the early rally, as a “Too Hot” number will invite even more Fed tightening, while a “Too Cold” number will increase stagflation risks.  Outside of the PMIs, we also get Jobless Claims (210K) and Durable Goods (E: -0.5%) although they shouldn’t move markets.

From the Fed today we get Kashkari (8:30 a.m. ET), Waller (9:10 a.m. ET) and Bostic (11:00 a.m. ET) and of the three, Waller is the most important (he’s Fed leadership and if he hints at a 50 bp hike expect that to mildly weigh on stocks).

What the Fed Decision Means for Markets

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What’s in Today’s Report:

  • Fed Meeting Takeaways
  • What the Fed Meeting Means for Markets

Stock futures are lower and oil is back above $100/barrel this morning amid negative comments from Russia about Ukraine negotiations while the yield curve continues to flatten post-Fed.

This morning, the Kremlin said that reports of progress in talks are “wrong” and Biden saying Putin is a “war criminal” is “unforgivable” which has sparked risk off money flows over the last hour.

Economically, Eurozone HICP rose 5.9% vs. (E) 5.8% Y/Y bolstering concerns about high inflation which has further flattened the yield curve in early trade.

Today, we will get several important economic reports including: Jobless Claims (E: 218K), Housing Starts (E: 1.70M), Philadelphia Fed Manufacturing Index (E: 15.0), and Industrial Production (E: 0.5%). There are no Fed speakers today.

Bottom line, the Fed is continuing to be digested today but focus has largely returned to Russia-Ukraine. And if the odds for a peace deal deteriorate meaningfully, expect at least a portion of yesterday’s big rally to be given back. Additionally, if economic data continues to indicate stagflationary trends emerging, risk assets could trade with a heavy tone.

FOMC Preview

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What’s in Today’s Report:

  • FOMC Preview

Stock futures are modestly lower this morning as investors continue to monitor the war in Ukraine and rising tensions between the U.S. and China surrounding the conflict.

Geopolitically, a new round of talks is scheduled between Russia and Ukraine today while the U.S. has warned China over providing Russia with military support.

Economically, several Chinese data points handily beat estimates overnight but the data was overshadowed by a sharp rise in Covid-19 cases in various regions of the country while European data came in below estimates this morning. With geopolitics still dominating news wires and the Fed meeting coming into focus, however, none of the data materially moved markets overnight.

Today, there are two economic reports to watch ahead of the bell: PPI (E: 1.0%, 10%) and Empire State Manufacturing Index (E: 8.0), and with the March FOMC meeting getting underway, the inflation data will be closely watched and could cause a dovish/hawkish reaction across asset classes ahead of tomorrow’s announcement.

Bottom line, Ukraine headlines will still move markets today and any progress towards a ceasefire will be well-received however expect a sense of Fed paralysis to increasingly grip the markets as the day goes on and traders position into the first rate hike in years.

Updated Near-Term Market Outlook

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What’s in Today’s Report:

  • Updated Near-Term Market Outlook
  • Weekly Economic Cheat Sheet

U.S. stock futures are trading higher with European shares amid renewed hopes of a ceasefire in Ukraine while Asian markets declined overnight on new Covid-19 lockdowns.

Geopolitically, Russia continued with aggressive military attacks against Ukraine over the weekend but diplomatic negotiators noted solid progress in ceasefire discussions which is helping risk assets bounce this morning.

There are no economic reports today and no Fed officials are scheduled to speak.

The Treasury will hold an auction for both 3-month and 6-month Bills at 11:30 a.m. ET today which may shed some light on the market’s current outlook for near-term Fed policy. And if shorter duration rates rise in the wake of the auctions, that could weigh on stocks as the Fed meeting comes into focus.

Bottom line, markets are still very much focused on Russia and Ukraine right now and for stocks to meaningfully bounce today, we will need to see real progress towards a ceasefire. Conversely, a deteriorating situation in Ukraine could see stocks retest multi-month lows to start the week today.

Market Multiple Chart

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What’s in Today’s Report:

  • Market Multiple Chart

Futures are slightly higher following mixed economic data as markets look ahead to today’s jobs report.

Markets are looking for any signs inflation has peaked but that was not the case in Europe today as EU HICP  (their CPI) rose 5.0% vs. (E) 4.8%.  Economic growth was also solid (EU Retail Sales beat estimates) so the high inflation number isn’t hitting stocks ahead of the jobs report.

Today focus will be on the Employment Situation Report and estimates are:  Job Adds 400K, UE Rate 4.1%, Wages 0.3% m/m & 4.1% y/y.  Markets will be especially sensitive to a “Too Hot” number as that will further stoke fears of a more hawkish Fed and a “Too Hot” report will hit stocks.  There are also three Fed speakers today, Daly (10:00 a.m. ET), Bostic (12:15 p.m. ET) and Barkin (12:30 p.m. ET) and while they aren’t Fed leadership, if they are “hawkish” and talk about March rate hikes or balance sheet reduction, that will be a headwind on stocks.

 

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Market Multiple Table: January Update

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What’s in Today’s Report:

  • Market Multiple Table: January Update
  • OPEC+ Meeting Takeaways (Not So Bullish)

Stock futures are down modestly this morning, but off the overnight lows in sympathy with rising European shares while Asian markets declined on Chinese regulatory concerns and fresh COVID lockdowns in Hong Kong.

Final December Composite PMI’s were slightly disappointing but investors are already looking ahead to 2022.

Today, there are three economic reports to watch: Motor Vehicle Sales (E: 13.2M), ADP Employment Report (E: 414K), PMI Composite Final (E: 56.9). It will be important for the latter two to point to continued growth but not at a pace that would cause an additional hawkish shift by the Fed as that would likely send rates sharply higher and act as a headwind on broader equity markets.

There are no Fed speakers today but the minutes from the December FOMC meeting will be released at 2:00 p.m. ET.

Tom Essaye Quoted in Bloomberg Quint on January 4, 2022

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U.S. Stocks Start 2022 at Record; Treasuries Fall: Markets Wrap

Bottom line, the outlook is positive for stocks, but the removal of stimulus…wrote Tom Essaye, a former Merrill Lynch trader who founded “The Sevens Report” newsletter. Click here to read the full article.

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