Rise and shine everyone.

Yesterday, we talked about watching one particular number - the ISM Services Prices Paid. And what we saw was a surge. The immediate reaction in the market was a pullback with the Nasdaq dropping over 1%. Add to that JOLTS came out stronger as well, indicating some tightness in the job market contrary to what the Fed thought and even before adverse immigration policies are put in place. All things considered, we’re setting up for a resurgence in inflation.

With that we have the probability of Fed rate cuts being pushed back. We don’t expect a cut in January, but now Fed Funds Futures are looking at more towards mid-year. That’s so not cool for markets! We’re going to have higher rates and a higher USD, which puts pressure on stock prices.

Chinese and Hong Kong equities continued to slide, with the Hang Seng hitting a 3-month low. A joint announcement from the PBOC, MOF, and NDRC on trade-in program upgrades fell flat, offering few specifics and leaving uncertainty over whether 2025 allocations would exceed those in 2024. Xiaomi dropped 4.7%, while the SSE Consumer Discretionary Index fell 2%.

The ASX 200 reversed early losses to close nearly 1% higher following softer CPI data, with the financials index up over 2%. ANZ now projects the first 25bps rate cut by the RBA in May 2025, reflecting a steeper Australian yield curve. The trimmed mean CPI for November came in softer than the prior reading, leading to a 5bps drop in the 3-year yield and the AUD returning to last week’s levels after initially rising pre-data.

The Nikkei softened after its strong performance yesterday, following the lead from the US, while the Kospi extended its recovery from end-of-year lows and is now trading above levels seen on December 3rd, when martial law briefly escalated political tensions.

Japanese yields continued their climb, with the 10-year JGB yield reaching 1.18%, the highest since July 2011. The BOJ will likely take encouragement from Nikkei heavyweight Fast Retailing’s decision to increase wages by up to 11% by March.

On the micro front, Samsung Electronics missed revenue and operating profit expectations in its Q4 preliminary results, citing weak demand for conventional memory chips used in PCs and mobile devices, rising R&D expenses, and intensifying competition in the mobile phone market. Notably, there was no mention of AI-related demand. Shares initially fell 1.1% at the open but later rebounded sharply, closing up 3.0%, quite likely after comments from Jensen Huang during CES. Finally, US earnings season starts next week. This is the earnings for Q4, 2024 and the forecasted EPS growth is 11.9% for the S&P 500. This is down from a forecast of 14.5% in September, according to FactSet. So while expectations continue to remain relatively high, they have been tempered somewhat. Valuations continue to remain rich overall, and with the Fed slowing down on rate cuts we’re likely to see a slowdown in terms of multiple expansions.

Chart of the Day

Interesting observation from Morgan Stanley.

What we’re watching today

• UST 10Y Yield + Oil prices spiking

• Initial Jobless Claims

• FOMC Minutes at 2pm ET - while we know what happened during the FOMC, this could be a market mover if we see more serious language around the higher expectations of inflation and a hawkish view of rates.

Calendars

(news taken from Reuters, FT, Bloomberg; Calendar from Trading Economics)