MARKET WRAPS
Watch For:
ISM Report on Business Manufacturing for December; Canada Industrial Product & Raw Materials Price Indexes for November
Opening Call:
Stock futures ticked up Tuesday, suggesting the New Year's strong start will continue ahead of fresh data on manufacturing and the labor market.
Stocks have continued their upward march in 2022 after the S&P 500 closed up 27% last year, while investors are continuing to assess data on the spread of the Omicron variant. Cases hit a record in the U.S. and hospitalizations are rising but remain below pandemic peaks, according to data from Johns Hopkins University.
"The body of evidence that Omicron is materially less severe is growing and growing. The notion that a virulent but mild variant becoming the dominant variant is really a large step towards the end of the pandemic, " said James Athey, an investment manager at Abrdn.
"The mildness of Omicron and therefore, potential for less disruption, less lockdown measures-all of these should feed directly into earnings expectations," he added.
Purchasing managers' surveys on the manufacturing sector for December are slated to be released at 10 a.m. ET. Economists are expecting a slowdown in growth, forecasting that supply-chain issues may have constrained U.S. factories.
The Labor Department is scheduled to put out a survey on job openings and turnover for November, also at 10 a.m. The previous month's data showed there were 3.6 million more job openings than people looking for work, highlighting the tight labor market.
Overseas, the pan-continental Stoxx Europe 600 added 0.5%, with airline stocks rising sharply. In Asia, major benchmarks were mixed.
Economic insight:
The U.S. economy is set to grow 2% in 2022, a much lower rate than in 2021, as consumer spending normalizes, said Natixis's chief economist for the Americas, Joseph Lavorgna.
The consumption boom in 2021 was supported by a $2 trillion stimulus bill, but now that the stimulus is gone and the personal savings rate is back to pre-pandemic levels, there is going to be a big comeuppance in spending in 2022, he said.
"Demand has been satiated, so without the breadth of improvement elsewhere in the economy, the narrowness of last year's GDP gains is an ominous sign for 2022," Lavorgna said.
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U.S. employers are likely to have added 400,000 new jobs in December compared with the 210,000 jobs created in November, said Barclays.
Seasonal factors, the improvement in jobless claims and the fact that some hiring may have been pulled forward likely pushed up payrolls. However, it may also be the case that the appearance of Omicron reduced hiring in face-to-face services sectors, including restaurants, food service, and hospitality, Barclays added.
"Although the surge in Omicron cases primarily took place after the December survey period, new cases were moving higher in the first half of December and could have depressed hiring," Barclays said.
Forex:
The dollar continued to advance in Europe with the currency's strength bolstered by two narratives, according to Silicon Valley Bank's Minh Trang: a bit of a safety play following Omicron-variant headlines and the U.S. economy remains solid, which will allow the Federal Reserve to raise rates.
Bannockburn Global Forex said the dollar is likely to strengthen further in the near term on rate-rise expectations before turning lower in the second half of 2022. The market has priced in nearly 75 basis points of rate rises in 2022 and sees a two-thirds chance of an increase in March, said Bannockburn strategist Marc Chandler. The risk is "on the upside" for inflation in January and February, which will support rate rise expectations.
"We suspect that the dollar's high isn't yet in place and look for a more sustained pullback in the second half of the year as the economy [we anticipate] slows toward trend."
For some on Wall Street, it's not just a question of how soon the Fed might raise rates, but whether the central bank might bump up its currently near zero target by more than the customary quarter percentage point.
BMO Capital Markets said a 50 basis point rate increase could happen if inflation expectations data really started to surge higher. With expectations already swirling toward the possibility of a March rate increase, BMO said "the most compelling scenario for a 50 basis point hike is in the event the Fed waits to see if inflation eases during April/May and are wrong; leaving the FOMC decidedly behind the curve," and needing to catch up with a more aggressive tightening.
Elsewhere, the yen weakened against most G-10 currencies, hitting a five-year low verses the dollar as risk appetite improved.
"The yen has really fallen off, that's classical weakness based on investor appetite to take risk," said Gregory Perdon, co-chief investment officer at Arbuthnot Latham. "People are buying equities, buying high yield [bonds]-that's the market tone."
Bonds:
The rise in 10-year Treasury yields above 1.60% for the first time since end-November "serves as a foretaste of what could follow in a year of elevated inflation and prospective monetary tightening," said Michael Leister, head of interest rates strategy at Commerzbank. In the near term, positive macroeconomic data could add to the selling pressure.
"Near term, macro data will be key as markets shrug off Omicron fears and upbeat data over the coming days should only add to this sentiment," said Leister.
In the eurozone, while government bond yield spreads are on a "tightening spree," bond syndications are ensuring volatility, Leister added.
Investors will watch for employment numbers coming out Friday, expecting December will show strong job creation, although possibly curbed by the Omicron spread toward the end of the month.
Spartan's Peter Cardillo said that, historically, the direction of the markets in the year's first week of trading "generally sets the tone for the ongoing market's performance."
Commodities:
Oil prices extended gains in Europe ahead of the OPEC+ meeting, but Swissquote said Brent will likely remain capped at $80 even if the cartel sticks with its modest 400,000 barrels a day increase.
"Even with the idea that better days are ahead of us and recovery should support better demand in oil, the IEA has been warning of a larger global glut in the first months of the year."
Gold prices ticked higher with some investors "seeking the safety of the precious metal as some countries tighten measures to contain the escalation in the numbers of new Omicron cases," said Ricardo Evangelista, a senior analyst at ActivTrades.
Any gains will likely be capped, he said, with both the dollar and Treasury yields on an upward trajectory in anticipation of rate hikes from the Fed.
Copper weakened on the London Metal Exchange's first trading day of the year, pressured by a stronger dollar.
Fitch Solutions said copper prices look set to fall, but not by as much as it previously expected. It has raised its copper price forecast for 2022 to $9,200 a ton from its earlier $8,000 a ton estimate, retaining its bearish outlook as fundamentals weaken in the coming months.
Fitch reckons that tight copper inventories at both the LME and the Shanghai Futures Exchange would ease, while consumption should stay stable. However, copper price declines should be limited by higher 'green demand' amid the expansion of the renewables sector.
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01-04-22 0549ET
