MARKET WRAPS

Watch For:

University of Michigan Preliminary Consumer Survey for February; Enbridge Earnings.

Opening Call:

Stock futures fell and bond yields largely rose, suggesting that the volatility driven by higher-than-expected inflation data would extend into a second day.

The narrative in markets is dominated by concerns over when, and by how much, the Federal Reserve will raise interest rates as it faces off against historically high inflation. The worry is that higher rates could dent economic demand and corporate earnings growth, which would, in turn, weigh on the stock market.

Stocks have traded choppily this week, buffeted by earnings reports and shifting expectations about the prospective pace of central banks' monetary tightening. The S&P 500 is now on track for its worst weekly performance since mid-January.

"Inflation is currently in the public eye, it has become a political question," said Florian Ielpo, head of macro at Lombard Odier Investment Managers. "This is something that is concerning us, we have a rising risk of monetary policy mistakes. This is the number one risk we see in 2022."

Earnings season is ongoing, with private-equity firm Apollo Global Management, utility company Dominion Energy and steel producer Cleveland-Cliffs set to post earnings before markets open.

Meanwhile, the University of Michigan's consumer sentiment gauge for February is due at 10 a.m. ET.

Economic Insight:

Material shortages and supply bottlenecks are hampering the economy in many places and Commerzbank's supply-chain monitor shows that the situation hasn't changed much over the past month.

In maritime transport, congestion remains a problem with freight rates still extremely high, said Commerzbank's senior economist Christoph Balz. Prices for wood, memory chips and aluminum, which had fallen in the second half of last year, have increased somewhat again, he said. "In all, supply issues are likely to continue to dampen growth and boost inflation."

Stocks to Watch:

Affirm is continuing to take market share of what Citi thinks could be a softening U.S. buy-now-pay-later market.

Citi said a general slowdown in e-commerce drove on-year declines in January website visits for both Afterpay and Zip. Affirm bucked the trend with a 43% jump, helped by its rollout on Amazon. Yet an increase in app usage suggests in-store traction of buy-now-pay-later platforms could be increasing, Citi said. This could help support Zip and its Shop Anywhere feature.

Zip's website visits fell 74% on-year, while daily active app users rose by 35% despite what Citi suspects is slowing customer growth.

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Shares for Astra Space ended Thursday down 26% after one of its rockets experienced a problem during the company's first launch from Florida and failed to deliver payloads, including for NASA, to orbit as intended.

CEO Chris Kemp said in a tweet the company was analyzing data from the flight and apologized for the failure. Astra raised about $500 million through a merger with a blank-check company last summer and had previously told investors it estimated it would complete 15 launches this year and 300 by 2025.

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Expedia Chief Executive Peter Kern said issues affecting the company in the fourth quarter had more to do with inconvenience rather than consumers' fear of traveling.

Border shutdowns and planes out of service because of sick workers were much bigger factors, leading the company to believe that travel will be disrupted less going forward as long as future waves of the Covid-19 pandemic continue to lighten and the world continues to grow accustomed to living with it.

Kern said big cities and international travel haven't recovered as much yet and are both good guides for the company. "Directionally, the things that will be coming back as Covid lightens generally benefit us," said Kern.

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Tesla supplier Contemporary Amperex Technology will remain in the spotlight form investors in the short term amid rising tensions between Washington and Beijing, said Nomura. CATL's stock slumped 17% this week as the addition of 33 Chinese entities to the U.S.'s "unverified list" spooked investors.

Though CATL isn't on the list, a subsidiary of its laser-equipment supplier Shenzhen Hymson Laser is, which Nomura thinks may have driven the selloff. There are also concerns that China EV and new-energy companies could face U.S. sanctions, it said.

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Zendesk executives on a conference call to discuss fourth-quarter results declined to take questions on a buyout bid from a private-equity consortium, saying the offer--which it said was an all-cash transaction valued at $127 to $132 a share--undervalued the company and asked shareholders to back the proposed acquisition of SurveyMonkey's parent company at a special shareholder meeting on Feb. 25.

Asked about discussions with investors about the proposed Momentive acquisition, CEO Mikkel Svane said Zendesk realized it had surprised some investors and that discussions, which he said would continue over the coming days, had been productive and given time for investors to dig in and understand the proposed deal better.

Forex:

After Thursday's news that U.S. inflation rose to a four-decade high in January, the dollar is in a good position to rise against currencies of countries where central banks are less likely to raise interest rates quickly, said ING.

The yen and krona stand out as examples, possibly along with the euro after Christine Lagarde warned against raising rates too quickly.

"If the Fed is to step hard on the monetary brakes, we would certainly favour the dollar against the low yielders backed by central bankers who have firmly placed themselves in the dovish camp," said ING currency analysts.

Cryptocurrencies edged down for a second consecutive day. Bitcoin slipped 1.1% from its level at 5 p.m. ET Thursday, trading at around $43,250. It has risen over 12% in February.

Bonds:

The yield on the benchmark 10-year Treasury note climbed to 2.036%, before easing to 1.996%. It rose above 2% Thursday for the first time since mid-2019. Yields rise when prices fall. Shorter-dated bonds also continued selling off, with the two-year yield rising to 1.616%.

"The move is coming as the number of expected rate hikes this year rises. We're in a process where the Fed is catching up to the market," said Sebastien Galy, a macro strategist at Nordea Asset Management.

Commodities:

Oil prices rose after the International Energy Agency said that OPEC supply issues are worsening, threatening to tighten the market further and push prices higher. The IEA said in its monthly report that the cartel and its allies, known together as OPEC+, had undershot their supply targets by 900,000 barrels a day last month.

The supply challenges mean 300 million barrels of oil have effectively been lost from the market since 2021, the IEA said. It added that the number could rise to 1 billion barrels this year if OPEC members with spare capacity don't step in to make up for the shortfall.

Fitch said Brent will likely face downward pressure on expectations of increased supply and easing oil-demand growth.

While Brent prices are being squeezed by a "fundamentally tight" market, Fitch said higher production quotas by OPEC+ and large additions by non-OPEC countries including the U.S. should ease market tightness over 2022. Successful Iranian negotiations should also bring the country's oil exports back to the market.

Fitch has held its forecast for Brent to average $76/bbl over the course of the year, significantly below current spot price levels."

Other News:

There are two major risks to mining in 2022, according to Jefferies: the risk of a hard landing in China and the risk of a Fed policy misstep that leads to disappointing global growth.

As it stands, China has been switching from a headwind to a tailwind because of improving Chinese credit growth in recent months. "Which leaves the Fed. Barring a policy mistake that significantly impacts the global economy, commodity prices should continue to outperform," Jefferies said.


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02-11-22 0608ET