Europe While US markets have raced ahead this week European markets have undergone a pause with the FTSE100 struggling to build on this month’s early gains, while the DAX has also struggled for momentum this week.  The early year enthusiasm appears to have given way to a little bit of caution as we look to next week’s trifecta of central bank meetings, and what sort of outlook is painted by the Federal Reserve, ECB and Bank of England, and more importantly how many more rate hikes can we expect to see after next week.   Sainsburys share price is higher after Bestway Group announced it had taken a 3.45% stake in the business and suggested it could take a larger stake. Understandably this has prompted the inevitable speculation that Bestway might have larger designs on the UK’s second biggest supermarket, and what the future might hold for it going forward. While concerns about a takeover might have some merit one only has to look across the High Street at what’s happened with Morrisons and Asda to realise how any bid if it were to happen might end up becoming a very expensive proposition, in what is an incredibly competitive marketplace. Bestway would also have the considerable task of convincing Sainsbury’s two largest shareholders, the Qataris and Vesa that they have a credible plan to take the business forward. One upside to today’s announcement is that Bestway’s position as a wholesaler could offer synergies for Sainsbury in any future relationship, given that Tesco already owns Booker. Superdry shares have plunged after downgrading expectations for full year pre-tax profit to zero, from between £10m to £20m. In today’s H1 results the retailer reported a pre-tax loss of £13.6m, missing expectations of a £2.8m loss. There was an improvement on the revenues front, coming in at £287.2m, however management blamed underperformance in its wholesale division which saw a 57.4% decline in the Christmas trading period. LVMH shares are trading steadily close to record highs after reporting its full year results for 2022. Operating margin for the year came out at a very strong 26.6%, which had previously been a weak point, helped by a strong Q4 performance. Selective Retail was strong with Sephora but DFS was still weak due to China where H2 2022 was poor due to covid restrictions. Management was asked about current trends from China, and confirmed that Macau was very busy in January but that mainland China volumes were still just picking up and were still down -40% from 2019 levels in January, although that is a marked improvement on December which were down -85% from pre covid levels. For 2023 LVMH said it expects further growth with the year starting well as China’s economy continues its reopening process.    Rolls-Royce shares have slipped back after the new CEO Tufan Erginbilgic said that the company was a “burning platform”. Over the past few months, the share price has gone on a gradual recovery as air travel has improved, and engine flying hours have increased, while the company has slowly managed to improve its cash flow, so today’s pep talk is probably not what many employees would probably want to hear.  While Rolls-Royce has its problems, describing it as a “burning platform” is not the best message to send to shareholders and the markets. Rhetoric and tone are important when describing a business, especially one that is responsible for engine safety. Hopefully it won’t go down as a Gerald Ratner moment. US After such a strong move higher yesterday, US markets initially opened lower after the latest economic numbers pointed to a consumer that is starting to retrench, and personal spending contracted in November and December. The losses proved temporary after the latest University of Michigan inflation expectations survey pointed to a softening outlook on both the 1-year and 5–10-year levels, falling to 3.9% and 2.9% respectively. There continues to be an expectation that with next week’s Fed rate hike, the US central bank will follow the Bank of Canada in laying out the path to a pause in the rate hiking cycle. This seems like wishful thinking, and could well end in tears on Wednesday evening.      Intel has been one of the biggest losers today after issuing an ugly forecast for Q1, as well as saying it expected to post a loss in the current quarter. Q4 revenues came in at $14.04bn, sharply below expectations of $14.5bn, however it was the Q1 guidance that prompted the sharpest intake of breath. Intel said it expects to post a loss of $0.15c a share along with a sharp fall in revenues to between $10.5bn and $11.5bn, well below expectations of $13.96bn. Gross margins are also expected to fall to 39%, from an expected 45.5%. The extent of the fall initially dragged on the likes of Nvidia and AMD however they...

S&P 500 charge higher continued, and high beta plays didn‘t disappoint. Energy, financials, Russell 2000, emerging markets – all on fire. After Thursday‘s climb of bear market rally wall of worry (we‘re rather to meet recession and not soft landing – the contraction will be mild till Q3 2023), we‘re in for a daily deceleration today as I don‘t think yesterday‘s complacency would last till the closing bell. The weakness will likely show up in bonds first, underpinning the dollar – and the rest would be history. All on a daily basis – you can look forward for extensive pre-FOMC analysis next week! Keep enjoying the lively Twitter feed serving you all already in, which comes on top of getting the key daily analytics right into your mailbox. Plenty gets addressed there (or on Telegram if you prefer), but the analyses (whether short or long format, depending on market action) over email are the bedrock. So, make sure you‘re signed up for the free newsletter and that you have my Twitter profile open with notifications on so as not to miss a thing, and to benefit from extra intraday calls. Let‘s move right into the charts. S&P 500 and Nasdaq outlook S&P 500 bulls will have to defend yesterday‘s initiative - 4,040 is the first line of support, followed by (high) 4,010s. Any downswing attempt is though likely to be confined to the roughly mid point of this two strong supports‘ range. I don‘t think 4,075 would be overcome today. Credit markets Bonds give me a pause – we‘re likely to see stocks play defence first, especially on another housing data release (disappointment).

What will ECB Governing Council signal? Next week, the ECB Governing Council will meet and will most likely decide on the next 50 basis point (bp) rate hike. The key interest rates will then be 2.5%, 3.0% and 3.25%. What will be more exciting is what outlook the ECB Governing Council will give for the further course of action. The markets' attention will focus on whether there are any changes compared with the wording in December. At that time, the Governing Council had put in place ‘significant further rate hikes’ at a ‘steady pace’. This was a clear indication that a 50bp rate hike was likely, at least for the February meeting. Since then, however, there have been mixed messages from members of the Governing Council about what might happen thereafter. While some members were clearly in favor of an unchanged pace, there were also voices that brought a 25bp hike into play at the March meeting. Thus, it is foreseeable that there will be heated discussions within the Governing Council next week on what to signal to the markets for the then upcoming March meeting. We assume that there will be an agreement on an unchanged wording compared to December. Although the latest data showed a renewed drop in the inflation rate in December, this was exclusively attributable to lower contributions from energy prices. Core inflation, on the other hand, which predominantly reflects domestically generated price pressures, continued to rise. On the day before the ECB meeting next week, the inflation rate for January will be published. However, we expect a slight decline in core inflation at best. This should be decisive for holding out the prospect of a 50bp rate hike for March as well. The ECB economists' next forecasts on inflation and growth will also only be available in March, which also argues for leaving things unchanged next week. On the other hand, the significant decline in wholesale energy prices in Europe during the last few weeks would argue for a weakening of the statements compared to December, as price pressures are generally reduced and the ECB's next inflation forecasts in March should be lower. However, based on the statements of a number of members of the Governing Council, this should not be enough to restate the interest rate outlook next week, in our view. We expect a rate hike of 50bp in March. EZ – Inflation should continue to fall Next week (February 1), a first flash estimate of Eurozone inflation in January will be published. In December, inflation fell to 9.2% y/y, mainly due to a decline in energy price dynamics. In contrast, food inflation and core inflation picked up again slightly. Due to a largely sideways movement of global oil prices and a significant decline in European electricity and gas prices, we expect energy prices to continue to fall in January. However, the decline in electricity and gas prices will probably only have a dampening effect on energy prices in the medium to long term, due to the longer-term supply contracts and price commitments to households. In contrast, we expect a somewhat delayed decline in food prices and core inflation. In summary, we expect a further slight decline in inflation in January, mainly due to the declining dynamics of energy prices. This trend should continue in the coming months. EZ – Weak GDP momentum expected in 4Q In addition, a first flash estimate of Eurozone GDP growth in 4Q will be published next week (January 31). In 3Q, GDP growth weakened to +0.3% q/q. The high prices for gas imports were the main negative factor, which had a strong impact on the foreign trade balance. In contrast, consumption and investment have performed comparatively well. Since gas prices already fell significantly in 4Q22, this should have had a supporting effect on the foreign trade balance and thus on the economy in 4Q. On the other hand, we expect consumption and investment to have weighed on growth in 4Q. Overall, we therefore expect stagnation or a slightly shrinking GDP in the Euro Area in 4Q22. In the course of 1H23, we expect a gradual acceleration of growth momentum, due to falling energy prices and brightening leading indicators. US Fed to proceed more cautiously Next week, interest rates will continue to rise in the US. We expect a hike of 25 basis points (bp) and thus a smaller increase than in December. This is also in line with market expectations. However, at the last meeting in December, neither the decisive FOMC body nor Fed Chairman Powell provided clear guidance on the level of the next interest rate step. A 50bp hike is therefore also conceivable next week. However, a number of factors argue against it. At the press conference in December, Powell had emphasized that the speed...

Summary The 2.1% real PCE growth reported in yesterday's GDP report masked some underlying details which were revealed in today's personal income and spending report. The upshot is that consumer spending did more than lose momentum, it actually declined in the final two months of the year. Consumer flame flickers The staying power of consumer spending flickered out in the fourth quarter. Despite a modest and temporary jump in the saving rate in December, the bills are just stacking up too fast for many American households. After adjusting for inflation, spending on food, energy and other non-durable goods is now down for two months in a row. The weakness is more evident in big-ticket durable goods items where real spending is down four out of the past five months—the largest of those monthly declines were in November and December. Perhaps the most disconcerting development is that real service spending stalled in December. Without the offset from this larger category that typically plods along even during recessions, overall consumer spending ended the year with the only two monthly declines in real spending stacked up back-to-back. The way the GDP math works, that makes it very difficult for first quarter real PCE spending to come in positive. Yes, yesterday's GDP report for the fourth quarter revealed real personal consumption expenditures rose at a 2.1% annualized pace during the quarter. But a weak end to the year frames the first quarter of this year poorly. The economy was clearly losing momentum as the quarter progressed and today's personal income and spending report applies the actual numbers to that theme. Overall real consumer spending increased 0.4% in October before giving up half of that gain, falling 0.2% in November then tumbling another 0.3% in December. The weakening in November was concentrated on the goods side, particularly real durable goods spending, which fell 2.1% marking the worst monthly drop in big ticket outlays of the year. Spending on non-durables was down only slightly. The November goods weakness was partly offset by a modest 0.2% increase in real services outlays. The help from services vanished in December though as real spending outlays stalled. Another drop in real durable goods, this time 1.6% along with a 0.4% drop in non-durable goods resulted in the overall decline of 0.3% in real spending (chart). Download The Full Economic Indicator

United States: Headline GDP Growth Overstates the Strength of the Economy Real GDP expanded at a 2.9% annualized pace in Q4. While beating expectations, the underlying details were not as encouraging. Moreover, the weakening monthly indicator performances to end the year suggest the decelerating trend will continue in Q1. International: Sentiment in Europe Is Improving, Bank of Canada Calls It Quits For most of 2022, we had concerns that the broader European economy could be on the verge of a deep recession. While a warm winter and falling inflation have not completely abated those concerns, they do lead us to believe the European economic downturn will not be as bad as initially expected. Elsewhere, one of the major central banks opted to formally pause rate hikes this week. Following a 25 bps hike to 4.50%, Governor Macklem of the Bank of Canada declared the central bank's tightening cycle is over.   View the full report

The January Flash PMIs painted a somewhat less negative growth outlook, reflecting lower energy prices and generally easing financial conditions. Both manufacturing and services indices recovered in the euro area, bringing the composite index above 50 for the first time since last June, and pointing towards recovering activity. US indices have remained at recessionary levels, but the January uptick suggests that the risk of a hard landing has eased. Broadly, we expect the global manufacturing PMI to bottom during Q1, which is earlier than we anticipated previously. See the details in Research Global - Global manufacturing PMI heading higher in H1, 25 January, where we also revised our forecast for US GDP growth higher to +0.3% for 2023 (from -0.2%) and +0.9% for 2024 (from +0.5%). The uptick in developed market demand coincides with the brisk reopening-driven recovery in China. We will get more colour on Chinese holiday spending next week, when the January PMIs are due for release. For central banks, the early pick-up in activity is not purely a positive factor, as higher global demand could also mean more persistent inflation. While the European energy situation has eased markedly over the past months following warm weather and lower demand, the supply side still remains tight. Similarly, while US economy clearly lost steam towards the end of 2022, labour market conditions remain tight. We think the ECB will remain firmly on tightening path, and hike its policy rates by 50bp in the next Thursday's meeting, which is fully priced in the markets. While the final ECB members' commentary has been mixed, we expect Lagarde to strike a hawkish tone and guide the markets towards another 50bp hike in March. Ultimately, we see ECB's terminal rate at 3.25% in May, but risks remain tilted to the upside, see our ECB Preview - Set for another 50bp rate hike, 26 January. January Flash HICP figures will be released just ahead of the meeting on Wednesday; we look for an uptick both in headline (9.6%; from 9.2%) and core (5.4%, from 5.2%) terms. We discuss both economic and technical inflation factors related to the turn of the year in Euro inflation notes - January surprises, 25 January. While markets are well priced for a 25bp hike from the Fed next Wednesday, we discussed the conditions for future Fed rate cuts in our Fed preview - What it takes for the Fed to cut rates, 24 January. In brief, if the recent decline in inflation expectations continues towards year-end, Fed could turn toward cutting the nominal policy rate to avoid high real rates driving the economy into an unnecessarily deep recession. That said, the recent uptick in commodity prices combined with the tight labour markets point towards upside risks as well. We still expect Fed to deliver three consecutive 25bp hikes before ending the cycle.  The latest ISM manufacturing, ADP, and JOLTs data will be released on the afternoon ahead of the FOMC meeting, and resilient signals from the labour markets could further support the hawkish narrative. Consensus expects lower nonfarm payrolls print in the Jobs Report next Friday, but we still expect relatively strong employment growth at 200k. Rounding out the central bank week, we expect the Bank of England to deliver a 50bp hike. It will be a close call between 25 and 50bp, divided markets are leaning towards the latter. In our Bank of England Preview - Topside risk to EUR/GBP, 27 January, we revised our call with one more 25bp hike in March on the back of the recent strong data releases. Download The Full Weekly Focus