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It’s a Tightening Tantrum, Not a Taper Tantrum

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What’s in Today’s Report:

  • It’s a Tightening Tantrum, Not a Taper Tantrum
  • Weekly Market Preview:  Will the Fed Ease Hawkish Concerns, and Will Earnings Improve?
  • Weekly Economic Cheat Sheet:  FOMC Decision Wednesday, Key Inflation Data

Futures are modestly lower as escalating Russia/NATO tensions erased early solid gains.

Tensions between Russia and NATO increased over the weekend as the US and UK reduced embassy personnel, implying a military conflict could be imminent.

Economically, the EU flash manufacturing PMI beat estimates at 59.0 vs. (E) 57.9, but the UK number slightly missed (56.9 vs. (E) 57.3).

Today’s focus will be on the U.S. Flash January Composite PMI (E: 56.7) and markets will want to see stable data to ensure the economy is solid heading into future Fed rate hikes.  On the earnings front, there are three notable reports today, HAL ($0.34), IBM ($3.39), and LOGI ($1.22), but the really important reports won’t come until later this week.

On the geopolitical front, headlines have turned more ominous regarding a conflict in Ukraine, but as long as it’s limited and there isn’t imminent risk of a larger Russia/NATO conflict, then markets should largely look past the issue as it won’t impact economic growth or Fed policy.

Pace Matters

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What’s in Today’s Report:

  • The Fed Rate Hike Rhetoric Needs to Calm Down

Futures are slightly higher as markets bounce following Thursday’s declines after a generally quiet night of news.

Economic data was better than expected overnight as UK Industrial Production (1.0% vs. (E) 0.3%) and monthly GDP (0.9% vs. (E) 0.3%) both beat estimates.

Today focus will be on earnings, some economic data and more Fed speak.  Economically, the key releases today are Retail Sales (E: 0.0%), Industrial Production (E: 0.3%) and Consumer Sentiment (E: 70.4). From the Fed, we have Harker (10:00 a.m. ET) and Williams (11:00 a.m. ET).  The bottom line is that to help markets stabilize, the data and Fed speak need to give the “March rate hike” mantra a rest, so that means in-line economic data and a slightly more relaxed tone from Fed officials.

Finally, today marks the start of earnings season and there are multiple key reports to watch today:  JPM ($ 2.98), WFC ($1.09), BLK ($10.23) and C ($1.89).  Put simply, earnings need to be solid given the recent volatility, otherwise we can expect the declines to accelerate over the coming weeks.

Why the 7% CPI Print Wasn’t Incrementally Hawkish

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What’s in Today’s Report:

  • What the 7% CPI Print Wasn’t Incrementally Hawkish
  • EIA Analysis and Energy Market Update

Futures are little changed following a generally quiet night of news.

Vice-Chair Brainard’s prepared remarks for today’s testimony were released after the close and she said fighting inflation was the Fed’s “most important task” largely echoing Powell’s commentary from Tuesday.

Senator Manchin called the 7% CPI print “very troubling,” further reducing the chances of Build Back Better passing.

Today focus will be on Brainard’s testimony, but as long as she doesn’t imply sooner than expected balance sheet reduction, the market shouldn’t take her comments too hawkishly.  Other potential market events today include, in order of importance:  PPI (E: 0.4%, 9.8%), Jobless Claims (E: 205K) and three Fed speakers:  Harker (8:00 a.m. ET), Barkin (12:00 p.m. ET) and Evans (1:00 p.m. ET).

With stocks not too far from recent highs, they will again be sensitive to more hawkish rhetoric, so if Brainard and her Fed officials are hawkish, and we get a stronger than expected PPI report, don’t be surprised if that puts a mild headwind on stocks today.

Tom Essaye Quoted in The Moguldom Nation on January 10, 2022

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Inflation And Rate Hikes Hurt High-Growth And Low-Profit Tech Companies The Most: Here’s Why

Prospects of aggressive Fed tightening “are most negative for high-growth/high-PE names…said Tom Essaye of the Sevens Report in a note on Monday to clients, CNBC reported. Click here to read the full article.

Where Is the Fed Put?

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What’s in Today’s Report:

  • Bottom Line: Powell Renomination Hearings and the Fed Put
  • Chart: S&P 500 “Current Situation” Support Holds

Stock futures are extending yesterday’s afternoon rally in pre-market trade this morning as investors look ahead to Powell’s renomination hearings.

Overseas, Asian markets declined as new lockdown measures were imposed in parts of China due to rising Omicron cases while EU shares stabilized in sympathy with yesterday’s afternoon rally in U.S. markets.

Economically, the NFIB Small Business Optimism Index edged up to 98.9 vs. (E) 98.8 last month but the release is not materially impacting markets this morning.

There are no additional economic reports today but Esther George is scheduled to speak at 9:30 a.m. ET before Powell’s renomination hearings begin (10:00 a.m. ET). The market will be keenly focused on anything to do with balance sheet reduction plans and if the topic is “downplayed,” expect a further relief rally in equity markets.

Finally, there is a 3-Yr Treasury Note auction at 1:00 p.m. ET and if the results are weak, sending shorter duration yields to new multi-year highs, that could become a headwind for high valuation tech names and weigh on the broader stock market again.

How Should We React to Fed Hawkishness?

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What’s in Today’s Report:

  • How Should We React to Fed Hawkishness?
  • Weekly Market Preview:  All About the Fed (Powell testifies Tuesday, Brainard testifies on Thursday).
  • Weekly Economic Cheat Sheet:  All About Inflation (CPI Wednesday is the Key Report).

Futures are slightly lower following a generally quiet weekend as investors digest last week’s hawkish surprises ahead of Powell’s testimony tomorrow and CPI on Wednesday.

Economically, the only notable number was Eurozone Unemployment, which met expectations at 7.2%.

Chances of Build Back Better passing fell further over the weekend as according to the Washington Post, Manchin remains against the current framework for the plan.

Today there are no economic reports and just one Fed speaker, Bostic (12:00 p.m. ET), so we’d not be surprised to see markets churn ahead the three major catalysts coming later this week:  Powell’s testimony on Tuesday, Wednesday’s CPI Report, and Brainard’s testimony on Thursday.  Those three events will determine whether stocks rally of decline this week and any additional hawkish surprises will pressure stocks.

 

Tom Essaye Interviewed on TD Ameritrade Network The Watch List on January 5, 2022

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Breaking Down The FOMC December Minutes

The Fed is already actively discussing shrinking the balance sheet showing they are serious about being hawkish, and stocks dropped…says Tom Essaye of The Sevens Report. Click here to watch the full interview.

 

What the Fed Decision Means for Markets

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What’s in Today’s Report:

  • What the Fed Decision Means for Markets
  • EIA and Oil Market Update

Futures are sharply higher mostly on momentum from yesterday’s strong close and despite soft economic data.

EU and UK flash PMIs missed estimates thanks to drops in the service sector and that implies Omicron is a headwind on global growth in Europe.

But, for now that concern isn’t enough to stop a year-end Santa rally as the Fed was hawkish, but not too hawkish.

Looking forward, today will be a busy day.  First, we get two important central bank decisions (Bank of England at 7:00 a.m. and ECB at 7:45 a.m), and while neither are expected to change policy if they are hawkish in a tone that could partially offset the current Fed rally.

Meanwhile, we also get a lot of economic data including, in order of importance: December Composite Flash PMI (E: 58.4), Philly Fed (E: 28.8), Jobless Claims (E: 200K), Housing Starts (E: 1.563M) and Industrial Production (E: 0.7%).  Bottom line, the market will want to see stability in the data especially given the looming rate hikes in 2022, and the last thing the market will want to see is a material weakness in the data given the Fed’s new hawkishness.

Will Politics Force a Fed Policy Error?

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What’s in Today’s Report:

  • Will Politics Force a Fed Policy Error?
  • PPI Takeaways: Inflation Still Rising

U.S. equity futures are flat and global markets were mixed overnight as investors digest another hotter-than-expected inflation print and soft growth data ahead of the Fed.

U.K. CPI rose 5.1% vs. (E) 4.7% in November while Chinese growth data missed expectations across the board, rekindling stagflation fears ahead of the slew of central bank meetings in the back half of the week.

There are multiple economic reports due out this morning including: Retail Sales (E: 0.8%), Empire State Manufacturing Index (E: 25.5), Import & Export Prices (E: 0.7%, 0.7%) and the Housing Market Index (E: 84). But once again, unless there are any material surprises, the market impact should be limited ahead of the Fed this afternoon.

The FOMC Announcement will hit at 2:00 p.m. ET and Fed Chair Powell’s Press Conference begins at 2:30 p.m. ET. Bottom line, the biggest risk to equities remains a more hawkish shift in tone with a faster than anticipated acceleration in tapering of QE and any hints at more than two rate hikes next year.

Fed Meeting Preview

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What’s in Today’s Report:

  • FOMC Preview

U.S. futures are trading lower with most global equity markets after some negative Omicron headlines while investor focus shifts ahead to this week’s central bank meetings.

Initial studies in South Africa show the PFE vaccine has a lower efficacy rate against Omicron, rekindling concerns about the strain potentially leading to new restrictions or lockdown measures around the globe.

Economically, EU Industrial Production grew 1.1% vs. (E) 1.2% in October and the U.S. NFIB Small Business Optimism Index came in at 98.4 vs. (E) 98.3 but neither release materially changed the outlook for central bank policy.

Looking into today’s session, there is one inflation data point due ahead of the bell: PPI (E: 0.5%) but unless it is a material surprise against expectations, it should not move markets with the December FOMC meeting getting underway.

Bottom line, the focus has largely turned to this week’s central bank meetings, most importantly the FOMC, so it is likely that we see a form of “Fed paralysis” grip the markets between now and tomorrow afternoon’s meeting announcement, barring any unforeseen surprises regarding Omicron.