Morning Bid Americas: 'No Landing' scenarios swirl as markets recoil

Arch Capital

14/02/2024 11:00

A look at the day ahead in U.S. and global markets from Mike
Dolan
If the U.S. economy is still so strong that robust demand won't
allow inflation to return to the Federal Reserve's 2% target,
there's an outside chance the central bank may struggle to cut
interest rates at all this year.
    At least that's part of the "no landing" fears that emerged
after Tuesday's surprise January inflation readout, a report
that violently whipped U.S. stocks back from record highs while
catapulting Treasury yields  US10YT=RR  to highs for the year.
    Most dramatically, the sticky consumer price update managed
to take almost a full quarter-point out of market expectations
for Fed easing this year. 
    Even though that's settled back a bit early on Wednesday,
futures now see no more than 92 basis points (bps) of rate cuts
in 2024. There was as much as 150 bps priced little more than a
month ago.
    The chances of a first move as soon as March have now been
wiped to as little as 1-in-10. It's 50-50 for May and a quarter
point cut is now not fully discounted until the Fed's June 12
meeting.
    An overreaction to one number that's not even the central
bank's favored inflation gauge?
    Given the scale of the day's market reaction, you'd be
forgiven for thinking U.S. inflation spiked higher again last
month. 
    But even though it missed forecasts for a dip below 3%,
headline annual CPI actually fell in January to 3.1% from 3.4% -
even though core inflation was stuck at 3.9% and economists
fretted over still-elevated rent and service sector price rises.
    The spotlight now almost immediately shifts to the release
of PCE inflation measure for January, due on Feb. 29, for a
reality check on yesterday's spicy CPI and also to assess how
the Fed will review price pressures more broadly going into next
month's gathering.
    Already on Wednesday, a sub-forecast reading for British
inflation last month helped calm global markets a touch and
encouraged some hopes the U.S. CPI quirk was a one-off.
    But there is a chance now that, instead of markets bracing
for a possible rate cut at the March 20 meeting, they will
instead be speculating about whether Fed policymakers will raise
their "long run" forecasts for the policy rate - or so-called
"neutral rate" projections.
    And even though "soft landing" and rate cuts remain the
consensus view, almost one-in-five global fund managers polled
by Bank of America this month now see "no landing" as the most
likely scenario over the next 12 months. And that monthly survey
came in even before yesterday's CPI number.
    Another complication is that even though stocks fell back
sharply on dimmer rate cut hopes - with the near-4% plunge in
the Russell 2000  .RUT  index of U.S. small caps making it the
worst one-day plunge since June 2022 - the picture of
sustainably more durable U.S. economic growth going forward
should arguably be positive for equities.
    As it stands ahead of Wednesday's bell, S&P500 and Nasdaq
futures were back up about 0.5% and the Vix volatility gauge
 .VIX  fell back to 15 after spiking to its highest level of the
year on Tuesday.
    Another heavy diary of corporate earnings on both sides of
the Atlantic kept stock pickers in thrall.
    And despite the sharp recoil in Wall St indexes on Tuesday,
there were notable gainers. 
    JetBlue Airways  JBLU.O  soared 21.6% after activist
investor Carl Icahn reported a 9.91% stake and said the
carrier's stock was "undervalued".
    Tripadvisor's  TRIP.O  stock jumped 13.8% as the online
travel agency formed a committee to evaluate deal proposals.
    And in a bizarre twist after the bell, shares in ride
hailing firm Lyft  LYFT.O  soared almost 70% at one point, only
to retreat again after Lyft said its statement had incorrectly
put a key margin forecast at 500bps this year instead of 50bps.
    The stock quickly turned tail, although remains up 15% as
the firm did still beat quarterly profit estimates on Tuesday
and said it would generate positive free cash flow for the first
time in 2024.
    Elsewhere around the world stocks were mixed, lower on Asia
bourses that were open but higher again in Europe.
    The dollar's  .DXY  surge to 2024 highs after the CPI
surprise on Tuesday was also cut back today - not least against
Japan's yen.
    The dollar fell back 150.57, even if not far from a
three-month high hit early Tuesday.
    With markets wary of Japanese intervention above 150,
official comments were closely eyed.
    "We are watching the market even more closely," Japan's
Finance Minister Shunichi Suzuki told reporters. "Rapid moves
are undesirable for the economy."
    Japan's top currency diplomat Masato Kanda said the nation
would take appropriate action on forex if needed.
      
Key diary items that may provide direction to U.S. markets later
on Wednesday:
* Federal Reserve Vice Chair for Supervision Michael Barr,
Chicago Fed President Austan Goolsbee speak Bank of England
Governor Andrew Bailey testifies in parliament
* WTO General Council meeting
* U.S. corporate earnings: Cisco Systems, Kraft Heinz,
Westinghouse, Global Payments, Tripadvisor, Equinix, Ventas,
Albemarle, CME, IQVIA, Arch Capital, Occidental Petroleum,
American Water Works, Tyler Technologies, Rollins, CF
Industries, Williams, Charles River Laboratories, Martin
Marietta Materials, Generac 

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Rates and inflation    https://tmsnrt.rs/3U8HdD2
As US goods inflation eases, services step in As goods inflation
eases, services step in    https://tmsnrt.rs/3NBTf3Z
UK inflation remains unchanged    https://reut.rs/49ATQNU
Lyft shares' after-hours ride    https://reut.rs/3SGScDA
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (By Mike Dolan, editing by Alex Richardson
mike.dolan@thomsonreuters.com)
 ((mike.dolan@thomsonreuters.com; +44 207 542 8488; Reuters
Messaging: mike.dolan.reuters.com@thomsonreuters.net))