Top Three Things to Watch This Week

Macro Markets and The Fed

“He will win who knows when to fight and when not to fight.” – Sun Tzu

Ahead of a crucial FOMC meeting concluding on Wednesday, risk assets have proven that they can indeed go down. With high-growth stocks off 40% or more from ATHs, can mega-cap tech equities support a local low?

Fed Week Playbook, Bill Baruch’s Midday Market Minute

Most certainly, macro markets are at a very interesting conjunction early in 2022:Potentially peak hawkishness by the Fed and its governors Balance sheet runoff4x 25bps rate hikes priced in for 2022Tightening into an economic slowdownPeak Covid signaled across equity sectors and individual stocks (MRNA, ZM, PTON)High-beta, high-growth stocks have gotten obliteratedStructural shifts in the labor market leading to wage pressures Potential for a wage-price spiral development against the backdrop of higher base effects for inflation starting in Q2Higher mortgage and completion rates in housing may result in a cooler market

Federal Reserve

Number of 25bps Fed Rate Hikes Probability | 10yr Treasury Yield

Ahead of this week’s FOMC meeting, both the probability for the number of 25bps rate hikes as well as the 10yr treasury yield are trading off of their respective highs.

Along with a flattening yield curve, are markets signaling much lower inflation and/or growth expectations right when the Fed’s at maximum hawkishness?

10yr – 2yr U.S. Yield Curve

Bill Gross Sounding the Alarm

Source: @real_bill_gross

Peak Covid & Fading Covid Winners
We’ve talked about the dynamic of peak Covid in markets as well as the real economy for a while now. Price is king and stocks across the board have sent one clear signal: Peak Covid is here

Moderna, Zoom, Peloton

The price signal is amplified by global policy makers lifting restrictions in their respective jurisdictions. UK lifts Covid restrictions, says omicron wave ‘has peaked’ – AP “Face masks will no longer be mandatory in public places and Covid-19 passports will be dropped for large events as infections level off in most parts of the country, British Prime Minister Johnson said Wednesday.”WHO Calls on World Countries to Lift International Travel Bans – Schengenvisainfo News “Lift or ease international traffic bans as they do not provide added value and continue to contribute to the economic and social stress experienced by States Parties.”Source: WHO

Obliterated High-Beta, High-Growth Stocks
Along with higher interest rates and a less certain macro environment, future promises are less valuable in the eyes of investors. As a result, high-growth valuations have reverted closer to average.

Source: Bloomberg

“The markets have spoken. Covid is over. Govt stimulus (fed and congress) is over…growth multiples have fallen 50% back to Jan 2020 levels.” – @altcap

Structural Shift in the Labor Market
At the onset of Covid, a University of Chicago study pointed to the potential for a lack of return to the labor market. As signs of wage pressures are manifesting, the wage-price spiral could lead to more sustained inflation while base effects will ultimately lead to slower figures overall.

Source: BLS

Is the Housing Market Set to Peak?
After a lag in accounting for hot housing numbers in the official CPI, the shelter component has become a major contributor to high inflation figures.
While market participants expect a cooler housing market in 2022, will the same lag in the CPI’s shelter now contribute to a more persistent follow through on the upside?

Source: U.S. CB

“Rents Rise 14% in December” – Redfin

Source: Redfin

“Redfin Predicts a More Balanced Housing Market in 2022” – Redfin, Nov. 2021

Source: Redfin

Additional Notes on Macro

Nordea | Week Ahead: The US Dollar and Fed’s Tightening Cycles

“At one point, we are likely to be looking into a repricing of the euro. Nordea expects the latter to happen next year. But this year we look for dollar dominance once again and expect EUR/USD to fall towards 1.08 by the end of the year.“

“Others have argued that the Fed should hike five to seven times this year, but we think the Fed will be more cautious in speeding up its rate hikes and focus more on the excess liquidity in the system.“

“…the Conference Board Consumer Index is likely to mimic the surprising plunge of the University of Michigan Consumer index, which at the start of January fell to a decade low.“

Nordea | Major forecasts: A four-by-four to contain inflation“In response to rampaging US inflation, we now expect the Fed to hike rates four times this year followed by another four in 2023. We see more upside for long yields and expect EUR/USD to bottom by the end of the year.”

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Economic Calendar

U.S.

Data Release Times (E.T.)

China

Data Release Times (E.T.)

Eurozone (decreasing importance of events from top – bottom)

Data Release Times (E.T.)

Food for Thought

FOMC Rate Hikes & Balance Sheet Runoff

Source: @Fullcarry

Jeff Currie, Goldman Sachs Global Head of Commodities ResearachCost of Capital increase for oil & gas leading to energy underinvestment ESG mandates, public policy, and geopolitical shiftsIncrease in energy density in a move to renewablesThe later stages of fossils as a period of extreme price volatilityNuclear as a necessity in a move to sustainable, low-emission energy productionPodcast Link: What are Smarter Markets, Episode 1

OPEC Spare Capacity“Assuming production at prevailing quotas, OPEC spare capacity will fall to 4% of total production capacity by fourth quarter 2022, from 13% in the third quarter 2021, the U.S. investment bank said in a note.” – JP Morgan sees OPEC spare capacity falling through 2022, Reuters”While industry bears and pundits had cited bountiful OPEC+ spare capacity as the potential cure to the energy crisis in Europe, it is becoming abundantly clear that said spare capacity is markedly lower than advertised, and so the world can’t look to OPEC+ to solve the supply crisis. Bison was early to make this call in September last year, and despite major pushback, this view is slowly seeing broader acceptance.” – 2022 Oil Outlook & DUC Dilemma, Bison InterestsOPEC Crude Production

Source: Bloomberg

Despite much higher oil prices than pre-pandemic, OPEC’s oil production is lower than before — market participants have started to question OPEC/OPEC+’s spare capacity levels.

WTI Crude Oil Managed Money Positioning

Source: QuikStrike

EarningsLogitech (LOGI) after the bell on Monday:Consensus: EPS est. $1.22; Revenue est. $1.51bnCovid stocks have been under pressure with tough YoY comparisons — Logitech’s earnings are expected to follow a similar trend

Lockheed Martin (LMT) ahead of the bell on Tuesday:Consensus: est. $7.22 EPS; Revenue est. $17.66bnCan defense stocks offer safety in a more uncertain macro environment? Favorable geopolitical dynamics looking at Ukraine, South East Asia, Taiwan, etc.Defense spending as a % of GDP is not nearly rivaling Cold War levels

Microsoft (MSFT) after the bell on Tuesday:Consensus: EPS est. $2.29; Revenue est. $50.84bnMega-cap tech – heavily weighted in the indices – is crucial during this sell-off Signs of decelerating top or bottom line growth would indicate further pressure for broader markets

More earnings: McDonalds (MCD) ahead of the bell on Thursday, Apple (AAPL) after the bell on Thursday, Chevron (CVX) ahead of the bell on Friday

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