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LIVE MARKETS-First the downshift, then the pause, then the pivot, then the party

Reuters · 11/15/2022 11:48
LIVE MARKETS-First the downshift, then the pause, then the pivot, then the party

Main U.S. indexes advance: Nasdaq up ~2.5%

All S&P 500 sectors green: comm svcs leads

Euro STOXX 600 index up ~0.2%

Dollar down; gold edges lower; crude, bitcoin gain

U.S. 10-Year Treasury yield falls to ~3.81%

- Welcome to the home for real-time coverage of markets brought to you by Reuters reporters. You can share your thoughts with us at markets.research@thomsonreuters.com


The old Wall Street adage "don't fight the Fed" has proved to be sage advice in 2022.

With the Fed aggressively tightening monetary policy, volatility has increased, and stocks have been battered.

But for those looking for an equity market bottom, Chris Haverland, global equity strategist at the Wells Fargo Investment Institute (WFII), makes the following observation:

"The historical relationship between Fed policy and the S&P 500 index has been strong, with bear market finding a bottom prior to the last Fed rate hike."

In a out Monday, WFII said that with inflation still running well above the Fed's target, the FOMC will raise rates by another 50 to 75 basis points December, followed by one or two smaller hikes early in 2023.

At that point, Haverland says the U.S. economy will be in recession and then the Fed will likely pause, before laying the ground work for a policy pivot, that is, a federal funds target rate cut later in the year.

Given Fed tightening and WFII's view of a looming U.S. recession, Haverland favors U.S. equities over international equities, and higher-quality large- and mid-cap equities over small-cap stocks.

Haverland expects that equity markets will look toward the recovery in late 2023 and trough well before the recession ends, which has been the case in every bear market since World War II.

That said, he sees -term downside risks given that WFII expects the economy to worsen, the Fed to continue to tighten, and earnings expectations to come down.

However, as these factors get priced in, "we likely will proactively increase our equity exposure to those areas that have been historically more sensitive to an economic recovery."

(Terence Gabriel)



Thursday is budget day in the UK and power generators are among the potential losers should finance minister Jeremy Hunt get on with plans for a big increase in windfall tax.

Yet, some see scope for a sell the reaction.

"Speculation in the UK press over the weekend has cent red on a windfall tax increase to 35% for both oil & gas companies and power generators," say analysts at UK bank Barclays.

"We will have details Thursday 17 November. Power generator share prices reflect more than our worst-case government intervention scenarios, and we expect clarity to drive a rerating," they argue.

Shares in UK power generators SSE SSE.L, National Grid NG.L and Drax DRX.L have fallen 9%, 11% and 24% respectively over the last three months, clearly lagging the FTSE 350 .FTLC index, as you see in the chart.

For more on the budget: GRAPHIC-Sterling, Big Oil and homebuilders: the winners and losers from upcoming UK budget

(Danilo Masoni)



Two-fer Tuesday brought with it a welcome data double-shot, showing further evidence of cooling inflation and a rebound in New York manufacturing.

Since the "I" word has been everyone's favorite obsession this year, let's start with the Labor Department's Producer Prices index (PPI) USPPFD=ECI.

PPI, which measures the prices U.S. companies get for their goods and services at the proverbial factory door, echoed last week's CPI report by cooling down much faster than analysts expected.

"Inflation is starting to dwindle in the pipeline, and obviously that will show up in consumer inflation as well," says Peter Cardillo, chief market economist at Spartan Capital Securities in New York. "This is good for the markets and good for the consumer. It confirms that we've peaked in inflation.

The headline "final demand" a 0.2% monthly increase - half the consensus rate - and shed 0.4 percentage point on a yearly basis to an even 8%.

Core PPI, which strips away volatile food, energy and trade services prices, also cooled down, to 0.2% and 5.4%, on monthly and annual bases, respectively.

With respect to "intermediate demand," which tracks business-to-business prices, an 11.7% monthly plunge in raw materials bodes well for consumer prices down the pike.

All told, the report supports the case for the Fed easing its hawkish foot off the rate hike accelerator in December.

Financial markets have priced in an 85% likelihood of a smaller, 50 basis point interest rate hike month, and 55% chances of an even tinier 25 basis point hike at the central bank's February meeting.

The graphic below shows core PPI along with other major indicators, and where they sit relative to Powell & Co's average annual 2% inflation target. PPI is the third consecutive data point (after wage growth and CPI) to suggest we turned the corner last month:

The award for best performance by an indicator in a supporting role goes to east coast factories.

The New York Fed's Empire State index USEMPM=ECI surprised to the upside, delivering a reading of 4.5 and unexpectedly bouncing back to expansion territory in November after three months of moving in reverse.

An Empire State above zero signifies a monthly increase of activity.

On a granular level, however, it's a mixed picture.

Shipments increased, but orders softened. Inventories rebounded, employment continues to expand, but the prices paid component - moving in opposition to PPI - gathered heat.

"Although manufacturing activity returned to expansion, activity is expected to slow heading into 2023," writes Gurleen Chadha, U.S. economist at Oxford Economics. "Weakening domestic demand, high inflation, elevated interest rates, and recessionary pressures are likely to constrain the sector's advance."

A clearer picture of Atlantic regional manufacturing will be provided on Thursday, when the Philly Fed data hits the boards.

Wall Street liked the data just fine, veering sharply higher at the opening bell.

Communication services .SPLRCL, along with other FANG-related mega-caps, as well as chips .SOX, are leading the way, boosting the tech-laden Nasdaq .IXIC more than 11% above its Oct. 14 trough.

(Stephen Culp)



Wall Street's main indexes are sharply higher early on Tuesday as U.S. producer prices rose less than expected in October, providing fresh evidence of cooling inflation and boosting hopes of smaller interest rate hikes.

With this, the Nasdaq .IXIC is posting a gain of around 2.5%. The DJI .DJI and S&P 500 .SPX are both up around 1% or more.

All S&P 500 sectors are green with tech .SPLRCT leading the way higher. Chips .SOX and FANGs .NYFANG are outperforming with both indexes, rising around 4%.

Of , the SPX is within 1.5% of its descending 200-day moving average, which is around 4,075. The 200-DMA capped strength in late-August.

Here is an early trade snapshot:

(Terence Gabriel)



U.S. stock index futures have strengthened in the wake of cooler than expected inflation data released at 0830 EST/1330 GMT.

October headline PPI month-over-month and year-over-year were weaker than the prior month and below estimates, as were ex-food and energy readings:

Stock futures were higher ahead of the after a meeting between President Joe Biden and Chinese leader Xi Jinping in which they pledged more frequent communications.

In the wake of the data, Nasdaq 100 futures NQcv1, which had been up as much as 1.6%, are up 3%.

According to the CME's FedWatch tool, the market sees a 91% chance of a 50 basis point Fed rate hike at the December meeting from 89% before the data was released. There is a 9% chance of a 75 basis point increase, down from 11% before the .

All S&P 500 sector SPDR funds are quoted up in premarket trade with tech XLK.P, consumer discretionary XLY.P and communication services XLC.P posting the biggest gains.

The U.S. 10-Year Treasury yield US10YT=RR has hit a six-week low on the charts, and the U.S. dollar index =USD has hit a 14-week low.

Regarding the PPI data, Robert Pavlik, senior portfolio manager at Dakota Wealth said, "The headline is way better than expected, and the core is again way better than expected. It's going to confirm people’s hopes that inflation is starting to turn the corner. It's going to give the market more confidence."

Here is a premarket snapshot taken shortly before 0900 EST:

(Terence Gabriel, Ankika Biswas)



(Terence Gabriel is a Reuters market analyst. The views expressed are his own)