Daily Markets: Fed Futures Predicting a Hawkish 2022

Today’s Big Picture

Asian markets closed today’s trading down across the board as Hong Kong’s Hang Seng lost 0.07%, Taiwan’s TAIEX was off 0.15%, China’s Shanghai Composite fell 0.66% South Korea’s KOSPI declined 0.87% and India’s Sensex closed the session down 1.31%. Japanese markets are closed today to mark National Foundation Day. By mid-day trading, European equity indices are lower across the board and U.S. futures point to a soft market open later this morning.

Weighing on equity futures is the growing reaction to yesterday’s hotter than expected January Consumer Price Index report that showed the biggest jump in 40 years. In response to that report, Fed Funds futures currently have just about fully priced in an additional 1.25% of rate hikes by the end of 2022 with Goldman Sachs (GS) now calling for the Fed to hike interest rates at each of its seven remaining monetary policy meetings this year. This new forecast increases the estimated hike count from five, which many thought was aggressive at the time. Alongside Goldman’s upward revision, Deutsche Bank AG economists see the January CPI report leading to a 50-basis point rate hike at the Fed’s March FOMC meeting and now expect the Fed will boost rates by 25 basis points at every monetary policy meeting except November. Per Deustche Bank, “More limited evidence of waning inflation pressures in the back half of the year suggest that the Fed will continue their more aggressive response for longer.”

So far, however, the indication from policy makers suggests the Fed is more likely to move in more incremental moves so as to avoid threatening the global economic recovery as it looks to emerge from the global pandemic. As most pilots would say, coming in for a soft landing is never easy and it requires the correct speed, in the proper configuration on the right glide path. Sometimes crosswinds or other factors can make it challenging to execute, and that means making adjustments along the way. The same goes for monetary policy and the economy. As investors and equities grapple with those more hawkish expectations as we head into the weekend, we suspect the already highly anticipated January Producer Price Index report to be published on Tuesday, February 15, will be of even more interest to investors. As we wait for that report, perhaps market watchers will consider the Atlanta Fed’s GDPNow model estimates GDP for the current quarter at a whopping 0.7%.

Also as we fade into the weekend, President Joe Biden issued a warning to any Americans who remain in Ukraine to leave as Russia continues to threaten an invasion. How this plays out over the weekend will influence how equities begin the second half of the March 2022 quarter.

Data Download

International Economy

China announced New Yuan Loans for January at 3.98 billion, exceeding expectations of 3.7 billion and almost double December’s 1.995 billion figure on economic headwind concerns of the central bank including softer demand, continuing supply chain issues, and lowered expectations going into 2022.

Germany released January YoY Consumer Price Index growth which remained stable at 5.1%, matching both expectations and the previous month’s figure.

Fourth quarter 2021 UK Preliminary YoY GDP growth was announced at 6.50%, lower than the prior 7.00% figure but 0.10% higher than estimates confirming that the omicron wave did have an effect but was not as disruptive as prior covid waves. This fourth quarter print means the UK economy grew 7.50% in 2021 which is the largest growth spurt since the end of the Second World War.

UK December MoM Industrial Production (0.30%) and Manufacturing Production (0.20%) both beat estimates but came in much lower than the previous month’s 0.70% figure for each.

Domestic Economy

Later this morning at 10:00 am ET the preliminary Michigan Consumer Sentiment Index for February will be released and expectations are for a slight increase to 67.5 from January’s 67.2 print.

President Joe Biden’s administration said Canada should use federal powers to ease the growing economic disruption caused by the blockage of Ambassador Bridge, North America’s busiest international land border crossing and vital U.S.-Canada trade route. The blockage, which started on Monday, is by protesters opposed to coronavirus mandates.

Markets

Following the hotter than expected January Consumer Price Index reading for January, the 10-yr Treasury yield crossed over 2.00%, finishing the day at 2.04% as investors reset expectations for a 50-basis point rate hike by the Fed exiting its March monetary policy meeting. That mood weighted on growth stocks with the Nasdaq Composite losing 2.1% on the day, while the S&P 500 shed 1.8%, the Russell 2000 1.6%, and the Dow Jones Industrial Average closing down 1.5%. All 11 S&P 500 sectors closed lower with eight sectors losing at least 1.0% led by the 2.8% drop in information technology and the 2.9% fall in real estate. As we get ready to not only close out the trading week, but the first half of the current quarter, here are how the major market indicators stack up on a YTD basis:

• Dow Jones Industrial Average: -3.0%
• S&P 500: -5.5%
• Nasdaq Composite: -9.3%
• Russell 2000: -8.7%
• Bitcoin (BTC-USD): -5.8%
• Ethereum (ETH-USD): -16.4%

Stocks to Watch

Before trading kicks off, Alliance Bernstein (AB), Apollo Management Group (APO), Dominion Energy (D), Fortis (FTS), Magna (MGA), Sensient (SXT), and Under Armour (UAA) will be among those companies reporting their latest quarterly results.

Shares of “buy now, pay later” firm Affirm (AFRM) came under pressure yesterday after a partial leak of its quarterly earnings report even though its revenue for the quarter topped expectations, led by Gross Merchandise Value growth of +115% YoY to $4.5 billion. For 2022 the company issued upside guidance with GMV of $14.58-14.78 billion for the year.

Expedia Group (EXPE) reported better than expected December quarter EPS on revenue that rose 147.7% YoY to match the consensus forecast of $2.3 billion. Gross bookings for the quarter jumped 131% YoY to $17.5 billion, suggesting travelers were preparing for the omicron fade.

December quarter results at Zillow (Z) topped top and bottom line expectations as revenue for the quarter soared 392% YoY to $3.88 billion, handily beating the $3.29 billion consensus. Revenue gains were had at the company’s Homes, IMT, and Premier Agent segments while Mortgage segment revenue fell 17% YoY. For the current quarter, Zillow sees revenue of $3.1-3.4 billion vs. $3.3 billion consensus and commented that over 85% of the inventory is either sold or in agreement to be sold and Zillow expects to sell most of it’s remaining homes inventory by the end of 2Q22. The company also shared longer-term guidance, targeting $5 billion in annual revenue and a 45% EBITDA margin by the end of 2025.

The UK’s Competition and Markets Authority’s (CMA) accepted a revised offer from Google (GOOGL) relating to its proposed removal of third-party cookies from the Chrome browser and will keep a ‘close eye’ on Google as it secures final Privacy Sandbox commitments.

Caesars Entertainment (CZR) announced the expansion of Caesars Sportsbook to Washington state following its receipt of a sports wagering license from the Washington State Gambling Commission.

System1 (SST), the owner of consumer mapping services MapQuest, acquired RoadWarrior, a subscription app focused on route planning for gig economy drivers.

IPOs

There are no IPO offering expected to price this week. Readers looking to dig more into the upcoming IPO calendar should visit Nasdaq’s Latest & Upcoming IPOs page.

After Today’s Market Close

Once again it is Friday and that means there are no companies slated to report their quarterly results after the market close. Those looking for more on which companies are reporting when, head on over to Nasdaq’s Earnings Calendar.

On the Horizon

Monday, Feb. 14

• China: Foreign Direct Investment - January

Tuesday, Feb. 15

• Japan: 4Q 2021 GDP – Preliminary
• Eurozone: 4Q 2021 GDP – Preliminary
• Germany: ZEW Current Situation Index - February
• US: Empire State Index – January
• US: Producer Price Index – January

Wednesday, Feb. 16

• China: CPI and PPI – January
• UK: CPI – January
• Eurozone: Industrial Production - December
• US: Weekly MBA Mortgage Applications
• US: Import/Export Price index – January
• US: Retail Sales – January
• US: Industrial Production & Capacity Utilization – January
• US: NAHB Housing Market Index -February
• US: Weekly EIA Crude Oil Inventories

Thursday, Feb. 17

• Weekly Initial & Continuing Jobless Claims
• Housing Starts & Building Permits – January
• Philadelphia Fed Index – February
• Weekly EIA Natural Gas Inventories

Friday, Feb. 18

• Japan: CPI - January
• UK: Retail Sales – January
• Eurozone: Consumer Confidence (Preliminary) - February
• US: Existing Home Sales – January
• US: Leading Indicators – January

Thought for the Day

“My whole life has been one big improvisation.” ~ Clint Eastwood

Disclosures

• Affirm (AFRM) is a constituent of the Tematica BITA Digital Payments & Fintech Sustainability Screened Index

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Economy Stocks Earnings Central Banks