Jobs Report Short Squeeze, Big Bank Earnings, and December CPI

Top things to watch this week

The Economic Calendar:

MONDAY: 3-Month Bill Auction, 6-Month Bill Auction, Investor Movement Index, Raphael Bostic Speaks, Consumer Credit

TUESDAY: NFIB Small Business Optimism Index, Jerome Powell Speaks, Wholesale Inventories, 3-Yr Note Auction

WEDNESDAY: MBA Mortgage Applications, Atlanta Fed Business Inflation Expectations, EIA Petroleum Status Report, 4-Month Bill Auction, 10-Yr Note Auction

THURSDAY: Patrick Harker Speaks, CPI, Jobless Claims, EIA Natural Gas Report, James Bullard Speaks, 4-Week Bill Auction, 8-Week Bill Auction, Thomas Barkin Speaks, 30-Yr Bond Auction, Treasury Statement, Fed Balance Sheet

FRIDAY: Import and Export Prices, Consumer Sentiment, Patrick Harker Speaks, Baker Hughes Rig Count

Futures Expiration and Rolls This Week:

There are no expiration or rolls this week

Key Events:

• The first week of trading in the books. Markets will be busy heading towards the end of the week.
• The economic calendar focus is on Thursday’s CPI report, due out at 8:00 AM CT.
• Traders expect many companies to pre-announce earnings and guidance.
• Earnings season starts Friday with major banks reporting – Wells Fargo, JPMorgan Chase, Morgan Stanley, Citigroup, and PNC Financial.
• Ag traders focusing on U.S. WASDE and Quarterly Grain Stocks report on Friday.
• FOMC member Harker speaks on Friday.

Q4 Earnings season

Earnings season kicks off this Friday with bulge bracket banks reporting. Analysts expect companies in the S&P 500 to report their first year-over-year decline in quarterly earnings since the height of the Covid-19 pandemic in 2020. Fourth-quarter profits are forecast to have dropped 4.1%, a sharp reversal from the more than 31% growth a year earlier.

Companies in the S&P 500 are trading at around 17x their projected earnings over the next 12 months, in line with the 10-year average.

Analysts marked down their earnings expectations during the fourth quarter by 6.5%, a much sharper revision than average, according to FactSet. That gives companies a lower bar to clear to give investors greater confidence to buy.

Stock Index Futures

A jobs report short squeeze, buy stops, and options gamma hedging propelled stocks higher Friday to close the first week of 2023 higher. The S&P 500 and Nasdaq 100 were in positive territory for the week by +1.48% and +0.95%.

The monthly jobs report showed that employers added 223,000 jobs in December, the smallest gain in two years but more than the 200,000 expected by analysts. The job market has held up even as the Fed’s rate increases have sparked worries about a potential recession.

The bright spot of the report also showed wage growth continuing to cool. Average hourly earnings rose 0.3% in December from the previous month, down from a 0.4% increase in November.

Traders celebrated that the average hourly earnings number was less than the whisper number, although wage inflation remained elevated.

Natural Gas Futures

Natural Gas Futures have been tanking the last few sessions. March futures prices have declined by -45% in the previous 90 days and have fallen more than -15% to start 2023, to around $3.40 per million British thermal units.

Natural Gas futures traders are focused on the warmer than average temperatures. Last Thursday,  the Energy Information Administration said that 221 billion cubic feet of natural gas were withdrawn from storage facilities during the week that ended Dec. 30. That’s slightly more than the week before but below analyst expectations. Analysts predict upcoming withdrawals will look more like fall than winter and should leave plenty of gas to get through the heating season. Traders should pay attention if this catalyst changes.

Natural Gas is trading where prices were a year ago before the Russia invasion of Ukraine hindered energy markets.

Natural Gas futures traders are also focused on the Federal Reserve monetary tightening direction.

Interest Rate Futures

Will it be a 25 or 50-basis point Fed Funds hike from the FOMC? The focus from traders will be if the CPI update alters the consensus view that the Federal Reserve will hike interest rates by 50 points in February and another 25 points in March before going on hold at a terminal rate of 5.0% to 5.25%.

Minutes from the Fed’s last policy meeting, released last Wednesday, showed that officials expect to keep raising interest rates in case price pressures prove more persistent. Friday’s hiring data added to evidence that the U.S. labor market remains strong.

Atlanta Federal Reserve Raphael Bostic highlights how the next FOMC decision — either 25 or 50 basis points — will depend on economic data. He earlier highlighted employment numbers as a key input and now says that holiday shopping numbers could also influence the decision if consumers prove more or less resilient.

Goldman Sachs says the central bank hiking cycles are likely to pause sometime next year and looks for 10-year U.S. Treasury yields to peak at 4.50% in 1H23 before trending a tad lower into year-end 2023 to 4.30%.

U.S. Treasury yields current yield compared to the last newsletter:
30-Year yield  3.68% vs. 3.975%
10-Year yield  3.56% vs. 3.88%
5-Year yield  3.70% vs. 4.0%
2-Year yield  4.25% vs. 4.42%
2-10 Yield spread  -0.696% vs. -0.54%

Crypto

Total crypto derivatives volume plunged 49.2% to $14.2 billion, according to a CryptoCompare report, the weakest since October 2020. Bitcoin futures volume was down 48.3% to $13.2 billion, with ether futures volume off 55.3% to $481 million.

According to the report, the slump was in line with spot trading volumes across the industry, which fell 48.4% to $544 billion, the lowest figure since December 2019.

The fall coincides with the loss of users trust in centralized exchanges following the collapse of FTX in November. Crypto investors and market makers are cautious amid concerns over further contagion.

The lack of volatility and holiday has contributed to bitcoin essentially being in a trading range during the last 30 days between $15,500-$17,000.

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