The Saturday Hark Back - 20 Jan 2024

Capturing the themes of the week when there’s more time to digest them.

Jan 20, 2024

The Hark Back

The key narratives that drove markets last week:

A lot of talking, not a lot of price action…. Central Bankers in Davos told us it was too soon to declare victory on inflation, Chinese stock indices hit multi decade lows, TSMC propelled the AI complex with its growth revenue forecast, Red Sea tensions escalated but there may be a potential path towards a ceasefire, soft data gets softer in the US just as hard data hardens, Donald is in pole position leaving Haley dependent on New Hampshire primaries, regional bank earnings, Japanese CPI softened, Hunt wants two giveaway budgets before a Nov election and of course The Return of Davey Day Trader as we hit ATH's... Stonks only go up!!!!!

ECB congregate around a summer cut
Chinese assets struggling for international support
AI consuming all the chips you can produce
A glimpse of a path towards a ceasefire?
There's Donald and then everyone else is simply fighting for second place
Stagflation and tax cuts in the UK
Bonus - Tweet(s) of the Week
Top 10 Reads of the Week on Harkster.com (your research inbox)
Top 5 Podcasts of the Week
(Exciting) Week Ahead Previews

Harkster - All your financial research in one place. Catch the changing market narratives as they happen on Harkster's financial research management platform.

#1. ECB congregate around a summer cut

Who ever said forward guidance was dead? A quiet week with limited top tier data and as a result, central bank speak from Davos filled the void and garnered all the headline attention. Lagarde said it best, it's simply too early to declare victory on inflation. March expectations are at risk of dwindling away as long as the data continues to muddle along in Q1. ECB Holzmann's set the hawkish tail ("lingering inflation and geopolitical risks may prevent the ECB from cutting at all"), with the rest of the board members showing an openness to considering the need for a summer move.

The message is not as dovish as market pricing given the average blend of outcomes leans towards deeper cuts but at the same time, Lagarde and the rest of the CB board of governors are now open to the next move being lower. The incoming data will determine if the ECB cut this side of their summer break. Simkus warned those received in the front end that they will need a sudden deceleration in economic activity or a large tail event to trigger an April cut, let alone a March move.

FT - ECB concerned market bets on rate cuts risk derailing disinflation
Econostream - ECB’s Šimkus: Probability of Rate Cut to Rise Sharply After April
Nordea - ECB Watch: Premature pricing of rate cuts
ING - Minutes of December meeting show ECB still not spelling out rate cuts
ABN Amro - The ECB's Summer Love
Bloomberg - ECB Officials Converge Around June to Start Cutting Rates
FT - ECB resists spring interest rate cut as price expectations ease
Bloomberg - Davos 2024: IMF’s Gopinath Says Market Bets on Rate Cuts Are ‘Premature’

Even Hildebrand (once of SNB now of BlackRock) is back in the headlines "price increases in services are still prevalent and that wages are increasing rapidly" {Bloomberg - Davos 2024: Sticky US Inflation Will Wrongfoot Rate Bets}.

#2. Chinese assets struggling for international support

FinTwit is dominated by multi decade charts showing the underperformance of Chinese equities.

Source: @EconomPic

Xi doesn't want to stimulate, their exporting deflation across the world, Trump is ahead in the polls, the tech sector is restricted by government regulations, Biden has turned off their Chip source, population is shrinking, households exited covid on the backfoot but that's why we're here, not where we're going.... Is China in an extended doom loop or a medium-term opportunity for your pension? There was a late bounce to wrap up the week, but investors will need more than the national team buying the dip, meaningful fiscal and policy support to tempt those to re-enter if it is within their mandate.

Maybe the answer is to be found in Dublin? Who hasn't put the world to right, solved all of its problems over a pint of Guinness?

The FT report "Li’s trip to Dublin, his only European destination outside Switzerland following an appearance at the World Economic Forum in Davos, was a chance to encourage Ireland to maintain close ties and keep semiconductor sales flowing at a time when larger EU states are taking a harder stance on Beijing." (FT - Li Qiang hails China’s friendly ties with Ireland as a ‘good example’)

Bloomberg - China’s Biggest Broker Curbs Short Sales After Stock Rout
Economist - China’s population is shrinking and its economy is losing ground
SCMP - China jobs: youth-unemployment rate returns, adjusted, stands at 14.9%
Nordea - China: Uncertainty remains high
Bloomberg - China Downplays Big Stimulus in 2024, Testing Investor Patience
Bloomberg - Hang Seng Index’s Worst Slump in 15 Months Has a Silver Lining
Bloomberg - That Thunder Out of China Is Loss of Confidence
BNYM - China GDP Review; APAC Currency Watch
FT - US Treasury team set for Beijing talks on economic co-operation
ING - Between doomsaying and reality: There’s still no rush for Chinese cars in Germany
FT - China’s green tech surge could turn global climate politics on its head
Bloomberg - China Weighs $139 Billion Sovereign Bond Sale to Boost Economy
FT - China’s economy faces ‘critical year’ to dispel deflation and revive confidence
The NY Times - Apple Will Discount iPhones by $70 in China Starting Thursday

#3. AI consuming all the chips you can produce

The equity world has been dominated this week by TSMC earnings and the expected AI demand (FT). This propelled Nasdaq outperformance as TSMC expecting a 25% growth in semiconductor sales shown a halo over the sector. This aligns with Nvidia, up 23% in the first few weeks of 2024. That’s approx. a $200bln increase in market cap and is now targeting Amazon to become the 5^th largest publicly traded company.

Bloomberg - TSMC Outlook Drives $165 Billon Chip Rally in 2024 Rebound Bet
Reuters - US semiconductor index jumps as TSMC signals strong AI chip demand
WSJ - TSMC Thinks 2024 Will Repower Chip Sales

#4. A glimpse of a path towards a ceasefire?

Most certainly there was an escalation of tension in the middle east, as US-led strikes on Houthis hold outs continued, retaliation rocket attacks on US freight tankers, Pakistan strikes on Iranian rebels, Gaza/Israel etc etc...

However, for the first time, there has been more of a focus on the path towards a ceasefire in the reports that have streamed through Harkster (your research inbox). As the pressures mount in Yemen, Red Sea and the risks of a famine in Gaza rise, can we see a the main global powerbrokers bring the sides together to form a lasting cessation?

Axios - Saudi Arabia: Peace with Israel conditioned on Gaza ceasefire, path to Palestinian state
Steno Research - When Will the Red Sea Crisis Be Over?
Reuters - U.S. lists Houthis as terrorists, rebels hit another US-operated ship
Bloomberg - Oil Advances as Twin Middle East Strikes Raise Escalation Risks
The Rest is Politics - Is the Middle East sliding into a wider regional conflict?
FT - China pushes for safety of Red Sea shipping as threat to its economy grows
The Guardian - Biden says two-state solution still possible after call with Netanyahu

#5. There's Donald and then everyone else is simply fighting for second place

Trumps Iowa performance put a heavy dent in the aspirations of Vivek, Haley and DeSantis. With Biden also lagging behind Trump in the polls despite a $5 trillion fiscal spend and stocks at ATH, is the race for the WH already done?

Vivek has dropped out of the race, endorsed Trump and tried to place himself as the favourite to be his VP
Having staked his candidacy’s future on performing in Iowa. DeSantis (21%), will be happy to have pipped Haley (19%) for second place. He spent a considerable amount of time, energy and funds in each of the individual counties within Iowa. DeSantis campaign now plans to skip New Hampshire and is instead attacking Haley in her home state of South Carolina. (Note: Trump is miles ahead of Haley in SC polls)
Haley's strategy was looking past Iowa and into New Hampshire (next up - Jan 23rd). Haley needs to perform in New Hampshire and make ground as a viable alternative candidate to Trump or he will continue to pick up GOP support. However, the momentum is not on her side, with the polls widening in Trump's favour since the Iowa primary.
- Bloomberg - "Haley has the same old problem, though: Attack Trump like Chris Christie and Asa Hutchinson did and you alienate the Republican Party’s far-right base. But holding fire costs, too. By not taking on the twice-impeached GOP frontrunner, unaffiliated voters may not engage, a former chairman of the New Hampshire Republican Party said."

Biden's focus on SPX ATH says a lot about Trump's influence on the campaign (h/t Reminiscences of a Shrub Operater - Wealth-flation vs Pleb-flation)

After an excellent week on the campaign trail for Trump, there is a risk that the courts are his biggest obstacle to re-election. Thus, even though they appear miles behind, Haley and DeSantis are still in a very important race, given the legal uncertainty surrounding Trump. If he was deemed ineligible, second place could quite quickly become first and the presumptive Republican nominee.

FT - Trump is back — how much of a problem is that for the Fed?
ZeroHedge - "We're In The Middle Of A War" - Vivek Shoulder-To-Shoulder With Trump To Battle The Deep State
Axios - Selective memory on Trump's economy
MacroHive - Trump 2.0: Volatility Ahead?
WSJ - Nikki Haley Faces a Problem in South Carolina: Her Home State Is Trump Country
FT - Could anti-Trump warnings backfire?
SEB - Disinformation and the super election year 2024

Source: FiveThirtyEight

#6. Stagflation and tax cuts in the UK

Not a lot of good news for Bailey this week as hotter CPI rolled back the cuts priced into the curve at a time when households have already started to pullback with Xmas retail data extremely disappointing. The job at hand to get inflation back to target will be even trickier if Hunt is true to his word and looks for two budgets, two round of tax cuts before an autumn general election. Didn't Truss and Kwarteng already try that?

FT - UK inflation unexpectedly increased to 4% in December
FT - How serious is the UK’s inflation setback?
FT - UK chancellor signals he wants more tax cuts before election
ING - UK wage growth slows as recruitment difficulties ease

Bonus - Tweet(s) of the Week

Bullish euphoria.... tweets you only see at a top? .....

Top 5 Podcasts of the Week:

GS: America Powers On: Why US equities are still poised to outperform in 2024
JPM - EM Fixed Income: It's going to be a long year (again)
Reuters - China’s Red Sea headache, Yemen's social media 'pirate' and US third parties
BlackRock: Cryptocurrency Decoded: Investing In Digital Assets
Forward Guidance - Kevin Muir: The Market Has Priced In Too Many Fed Cuts Since Government Money Printing Will Keep Nominal Growth High

The Week Ahead

Looking forward to next week...

After a quiet start to the year, I looked at next week's data calendar with excitement ...

Mon (Jan 22) - PBoC
Tue (Jan 23) - BoJ, New Hampshire Primary
Wed (Jan 24) - Bank of Canada
Thurs (Jan 25) - US GDP Q4 advance, ECB, Norges, SARB and CBRT
Fri (Jan 26) - Core PCE

Headline grabbing data events but will we learn anything new? It's too early to declare "victory" on inflation (h/t Lagarde) so we shouldn't expect anything more than BoC/Norges/ECB trying to push back against Q1 cuts, maintaining a "data dependent" stance and trying to remain as long as possible in this rate holding pattern until confidence is high that they've achieved their 2% inflation target. As a result, next Friday's PCE looks like it could be the most important data point as the #goldilocks theme has lost supremacy.

~~The Fed's~~ WSJ's Nick Timiraos (@NickTimiraos) has already commented on Twitter...

"Based on the Dec CPI and PPI, core PCE is projected to have been mild last month.

The modelers who forecast this expect core PCE rose 0.17% from Nov.

This would lower the 12-month rate to 2.9%.

The 3- and 6-month annualized rates would fall to 1.5% and 1.9%, respectively"

However, Steno Research see upside risks in their excellent piece US Inflation Watch: Methodology Matters - Upside surprise in PCE according to CPI?

Prepare for the Week Ahead with our dedicated smart channel on Harkster.com, your research inbox.

ING - Key events in developed markets next week
ING - January’s ECB Cheat Sheet: Giving markets the cold shoulder
Nomura - The Week Ahead – US Q4 GDP, ECB Policy Meeting, Central Bank Meetings in Japan and Malaysia
SEB - A busy week for the Central Banks

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