US stock markets shot up yesterday following the Fed’s monetary policy decisions. The Dow Jones gained 2.88%, the S&P500 gained 2.99% and the Nasdaq 3.41%. Before that, the clues seemed to get off to a pretty bad start, dragging their spleens from previous sessions like a ball and chain. The current pattern is quite classic following an announcement by the Fed that is a little less aggressive than expected, as we will dissect together below. Keep in mind that the interests of the financial markets do not always coincide with the interests of the real economy, or rather their horizons may be different (which is a problem in itself, but which we are not going to cause today). So today’s crazy stock market reaction, but the world is not saved from the effects of inflation.
Let’s start with some factual information:
- The Fed hiked rates by 50 basis points, pushing them previously from the “0.75% to 1%” range of 0.25% to 0.50%.” This is, as much has been heard recently, the biggest twist on the propeller since May 2000.
- The Fed begins its balance sheet at 1 . to shrinker June, at $47.5 billion per month. Starting in September, the rate will go up to $95 billion per month. This is “tapering”, or quantitative tightening: the steam is being reversed in the purchases of assets that have enabled the economy to weather the latest storms. With the central bank filled with $9,000 billion, it would take about 7 years to bring it back to pre-2008 levels, i.e. about $1,000 billion.
- Rate hikes will continue, at a rate of 50 basis points per meeting, for as long as it takes to ease inflation.
- Jerome Powell estimated that the state of the US economy (growth, full employment, investment) makes it possible to cash in on these rate hikes, which “won’t be fun“but who ends up alone”everyone will be better off†
Very classic so far. But I talked about the importance of form yesterday and that explains the rise in US indices last night: Powell ruled out the possibility of a 75 basis point rise at the next meeting, a part of the market feared. Two comments on this. First, the Fed had recently unleashed its “hawks” — its members were the most in favor of aggressive action — to imply that a 75 basis point hike could not be ruled out. Any resemblance to a plan that would allow Powell to rule out this scenario a few days later is not entirely coincidental. Second, investors, who always try to anticipate, for example when their extreme scenarios do not materialize. This is a sign that the situation is closer to normal, i.e. their normality, not necessarily economic normality (which does not fit well with an annual inflation rate of 8.5%).
It is clear that from a macroeconomic point of view, these interest rate hikes will cause great turmoil in the United States by increasing the cost of borrowing, whether buying a single-family home or investing in developing a business. But letting inflation spiral out of control would be even more damaging. Of the two conditions, the Fed has chosen the condition it penalizes least. Economists forecast two further increases of 50 basis points at the June and July meetings. Then others, then less strong. The central bank theme, which is never far from the front of the stage, will be in the spotlight today between comments about the Fed and the Bank of England’s decision on its own rates at noon. The BOE had started raising rates earlier than others, as it was already dealing with inflationary concerns related to Brexit. She must keep doing that. As for the ECB, its next monetary policy committee is scheduled for June 9 (the May 18 meeting is informal only). In view of the inflation developments in the eurozone, she too will have to react, sooner rather than later.
Another big news of the day, the publications of quarterly results of companies. Thursday is traditionally the busiest day in this area and this May 5 is no exception to the tradition: dozens and dozens of announcements in Europe and the United States in particular. A total of one hundred companies weighing more than $10 billion, from A such as Airbus and Anheuser-Busch Inbev to Z such as Zalando and Zoetis.
European leading indicators are bullish this morning, following Wall Street’s wake. The Japanese market is still on vacation, with Hong Kong and Sydney gaining about 0.8% at the end of the course. The CAC40 won 2.4% to 6,549 points at the opening.
Economic highlights of the day
The climax of the session is the Bank of England’s monetary policy decision at 1 p.m. In the United States, the Challenger study on layoffs (1:00 p.m.) and weekly employment data (2:30 p.m.) is on the agenda. All “macro” agenda here.
The euro rises to USD 1.0614. The ounce of gold bounces back to 1900 USD. Oil is strengthening, with North Sea Brent at $110.16 a barrel and US WTI light crude at $107.10. The yield on US 10-year debt fell to 2.91%. Bitcoin is trading around USD 38,700.
The main changes to the recommendations
- Amundi: Berenberg stays long with a price target lowered from EUR 85 to EUR 75.
- Carrefour: Berenberg remains on the buy side with a price target raised from EUR 23.10 to EUR 23.30.
- CGG: Portzamparc is going from buying to holding and aims for 0.81 euros.
- Elis: JPMorgan goes from neutral to overweight by targeting 17 euros.
- Eramet: AlphaValue moves from reducing to accumulating, targeting EUR 156.
- Geberit: Jefferies continues to underperform with a price target lowered from CHF 473 to CHF 461.
- Gurit: UBS moves from short to neutral, targeting CHF 130.
- Interpump: Berenberg remains long with a price target lowered from EUR 67 to EUR 60.
- Korian: Berenberg stays long with a price target lowered from EUR 35 to EUR 34.
- Novartis: Berenberg stays long with a price target raised from 85 to 90 CHF.
- Ocado: HSBC goes from selling to holding, aiming for 1000 GBp.
- Roche: Jefferies stays long with a price target lowered from CHF 450 to CHF 430.
- Sampo: Berenberg remains long with a price target of EUR 51 to EUR 52.
- Securitas: Jefferies has yet to be held with a price target lowered from 145 to 125 SEK.
- Sensorion: Jefferies stays long with a price target lowered from 3.30 to 1 EUR.
- Siegfried: Stifel begins the short follow-up targeting CHF 503.
- Air France-KLM: The company exceeds its profit expectations in Q1 thanks to the increase in reservations.
- Airbus: Adjusted EBIT for Q1 is higher than expected.
- ArcelorMittal: The results are higher than expected. But the group is lowering its forecasts for global steel consumption.
- Arkema: The chemist raises his forecast for 2022 after a solid Q1.
- Crédit Agricole: the bank improves its results, but foresees € 389 million in Russia.
- Legrand: reiterates its 2022 targets after a Q1 above expectations.
- Societe Generale: the results are higher than expected. The bank warns that the costs of the war in Ukraine are reflected in a rise in bad debts.
- Stellantis confirms its forecast for 2022 after a 12% increase in sales in the first quarter.
Important (and less important) announcements
- Kering launches an employee share operation.
- Electricité de France hopes for an agreement “in the coming months” for six EPRs in India.
- Atos launches an innovative “Edge-to-Cloud” solution based on 5G and artificial intelligence.
- There are rumors about Ubisoft: the Guillemots could seek support to remove the file from the rating.
- Valneva launches a clinical trial evaluating its vaccine candidate against COVID-19 as a heterologous booster.
- 2CRSi signs a €4 million contract.
- DBV Technologies places $15.3 million worth of ADS on the Nasdaq.
- Cerinnov signs € 2 million in new orders.
- Vicat, ALD, Vilmorin, Umanis, CGG, Aurea, EURO Resources, MRM, Selectirente, Hexaom, Sogeclair have published their accounts.
In the world
- Anheuser-Busch Inbev: Adjusted EBITDA growth above expectations. The predictions are confirmed.
- BAE Systems: The group confirms its sales and profit forecasts for the fiscal year 2022.
- BMW: Q1 profit boosted by Chinese joint venture and high prices.
- Contemporary Amperex Technology: The title is heavy after its quarter.
- Deutsche Lufthansa: the rise in the price of kerosene weighs on the rebound in reservations.
- eBay: The title fell 6.5% off-session after Q1.
- Enel: Forecasts for 2022 are repeating after a solid first quarter.
- Shell: the group makes a profit in the first quarter.
- Swiss Re: the reinsurer suffers a loss in the first quarter after a substantial profit a year earlier.
- Unicredit: The Italian bank is taking a large commission of €1.3 billion on its Q1 accounts, particularly related to Russia.
- Zalando: Forecast lowered after losses in Q1.
Important notices (and other)
- Barclays and Standard Chartered General Meetings Disturbed by Climate Protesters.
- Google is the target of a complaint in the Netherlands against the payment system of its Play Store.
- The parent company of the NYSE, Intercontinental Exchange, is buying the computer group Black Knight for USD 85 per share.
- Henkel will cut 2,000 jobs in its consumer goods division to save €500 million.
- Berkshire Hathaway rises to 15.2% of Occidental Petroleum.
- Hangzhou Hikvision falls in Hong Kong after threat of new US sanctions.
- Nissan will invest more than $700 million in Mexico.
- Dufry signs two new contracts with Salvador airport in Brazil.
- Main results publications of the day: Shell, ConocoPhillips, Anheuser-Busch Inbev, Airbus, Petrobras, Zoetis, AXA, Shopify, BMW, Crédit Agricole, Coloplast, Henkel… The whole agenda here.