Authored by Simon White, Bloomberg macro strategist,

The US stock market continues to be overvalued on several measures, exposing equities to further downside.

Stock pickers love bear markets. Suddenly many companies on their watch lists begin to look attractive. But despite the protracted equity market downturn, valuations – almost no matter how you slice or dice them – continue to look rich.

It’s true the S&P’s P/E ratio has fallen precipitously over the last two years, but that was from nosebleed levels, and it is now only back to its long-term mean. Valuations cannot be said to be unambiguously cheap at an index level. The Nasdaq’s P/E fell sharply too, but it is only just below its long-term average.

Long-term returns are what that matters to most investors, and on that basis disappointment is likely to await anyone buying stocks. The most popular measure of long-term valuation is the cyclically-adjusted P/E (CAPE). Buying the index when this is historically cheap typically leads to well above-average 10-year returns, and vice-versa.

The CAPE has fallen, but still remains in the top 90% of all its readings. This is the same for other measures of long-term value, such as Tobin’s Q (the ratio between a firm’s market cap and the replacement cost of its assets), and the price-to-sales ratio. Buffet’s famed, favorite measure – the market cap of US equities versus GDP – also remains elevated.

Even with the equity market down over 17% from its highs, these measures remain in the top 85-90% of all their readings. This is a market far from screaming “buying opportunity of a lifetime”.

As a stock picker, you are less interested in the index averages, which can be overly influenced by the valuations of a few mega-cap stocks. As long as there are plenty of lower-valued stocks to choose from you should be happy. But that has distinctly failed to transpire so far in this bear market.

If it had, we would have seen a pronounced shift in the distribution of the P/Es of S&P500 stocks. But it is little changed to that seen at the 2022 peak. This stands in stark contrast to the 2009 bottom, when there was an unequivocal and significant shift lower in companies’ valuations, leading to a bonanza for stock pickers.

It’s hard to make the case that the stock market has bottomed until we see a broad-based and noteworthy decline in P/E ratios. And stocks are unlikely to cheapen significantly until they adequately price two major risks: inflation (and therefore rates), and earnings.

We can think about how these relate to equity prices by looking at the “Rule of 20”, which states that over the long term, the P/E ratio and the inflation rate should sum to 20. When that sum is over 20, the market is said to be overvalued, and undervalued when it is below 20.

When inflation is high, as it was in the 1970s, nominal earnings rise, so P/Es should adjust lower to take account of this. Today the Rule of 20 implies an S&P 25% lower than its current price.

That implied value is destined to fall further as inflation begins to rise again, as it looks set to do, and also as earnings fall. It bears repeating that earnings are a lagging indicator, and they will only begin to decline after the recession – which continues to look odds on, even as early as the summer – has begun.

This is not supposed to be a hard forecast for the S&P, but when the gap between the rule-implied and the actual index level is as large as it is today, it gives a strong indication of the market’s direction of travel.

Despite risks from inflation and recession, investors are being offered scant margin to hold stocks, with the equity risk premium near the lows it reached in the aftermath of the GFC.

Still, the value sector has had one its best runs for fifteen years, outperforming the hitherto go-go growth sector for most of the last two-and-a-half years.

It should continue to do well, especially due to the generally low duration of value stocks, a sine qua non in an inflationary world. But until there is a re-rating lower in stocks across the board, it will be tougher to build portfolios of cheap, quality companies that have the potential to post strong, long-term returns. Stock pickers should bide their time for cheaper valuations ahead.

US stock futures rebounded on the last day of a turbulent month for stocks which saw much of the January gains wiped out, and even with S&P futures inching above 4000 the S&P 500 was on course to post a monthly decline as investor fears about a hawkish Fed response to sticky inflation prevailed. Contracts on the Nasdaq 100 and the S&P 500 rose 0.4% at 7:45 a.m. ET; the S&P 500 is set for a drop of more than 2% in February, trimming a sharp rally last month. Bonds sank in the wake of reports that showed accelerating inflation in France and Spain. The dollar reversed earlier gains and crypto rose.

Among notable movers in premarket trading, Zoom jumped after the video-conferencing software company issued an outlook for adjusted earnings that was much stronger than expected. Workday Inc. dropped after results, with analysts saying that the payroll software company’s outlook for subscription growth was cautious. Target rose after results beat expectations and Chevron expanded its stock buyback plans. Here are all the notable premarket movers:

• Chevron shares gain 1.3% as the company increased its annual rate of share buybacks in a show of confidence in its cash-generation goals.
• Dish Network Corp. shares are down 4.5% after BofA downgraded the satellite television company by two notches.
• Hims & Hers Health gains 9.1% after the health-care software solutions company posted 4Q results and 2023 guidance that beat estimates.
• Norwegian Cruise shares tumble about 6% after the company’s adjusted loss per share and adjusted Ebitda loss were worse than analysts expected in the fourth quarter. Peers Royal Caribbean (RCL) and Carnival (CCL) are trading about 1% lower.
• Olaplex falls 15% after the maker of hair-care products issued weaker-than-expected forecasts for net sales and adjusted Ebitda for the current year, projecting that 2023 will be a “reset year.”
• Progyny jumps 16% after forecasting 1Q revenue that beat the average of analysts’ estimates.
• Tesla shares gain 2.2% as the electric carmaker closes in on the market capitalization of Berkshire Hathaway Inc. — the fifth most-valuable company in the S&P 500.
• Target Corp. rises 1.3% after turning in a strong fourth-quarter performance, but the company offered a cautious financial forecast for this year as the retailer contends with shaky demand for discretionary goods.
• Workday shares decline 2.4%, with analysts noting the payroll software company’s cautious outlook for subscription growth, defying expectations for a stronger outlook.
• Zoom Video shares gain nearly 7% after the video-conferencing software company reported fourth-quarter results that beat expectations and gave an outlook for adjusted earnings that was much stronger than expected.

After a strong start to the year, demand for US stocks has tapered in February as data showed inflation remained elevated, raising fears that the Fed would keep interest rates higher for longer. The first quarterly decline in corporate earnings since 2020 has also hit risk sentiment. “The more upbeat sentiment that kicked off the week is ebbing away, with investors refocusing on risks ahead for the global economy,” said Susannah Streeter, head of markets at Hargreaves Lansdown.

Both US and European stocks ended last week with their biggest five-day drop this year on concern that central banks will ramp up their battle on inflation seemingly invulnerable to aggressive policy. Positioning data shows investors becoming more pessimistic as they amass short bets in both US and European equity futures, according to Citigroup strategist Chris Montagu who said investor sentiment toward stocks was starting to become pessimistic as they built short bets on S&P 500 futures last week. Other market strategists including Michael Wilson at Morgan Stanley have also warned that equities could see pressure in March from faltering earnings and higher valuations.

“Equity markets are not appreciating the macro challenges ahead,” said Wei Li, global chief investment strategist at BlackRock Inc. “That is not to say we cannot have shorter term bouts of rally, like what we saw in January, driven by technical factors, driven by FOMO.”

European stocks are in the red but off their worst levels with the Stoxx 600 down 0.1%. Healthcare and construction are the worst performing sectors while banks and insurance rise.  European bond yields climbed as investors digested hotter-than-expected inflation prints in France and Spain, prompting traders to crank up wagers for the ECB deposit rate to hit 4% for the first time, sending the yield on two-year German debt to the highest since 2008. Here are the most notable European movers:

• Monte Paschi falls as much as 13% after French insurer Axa launched a private placing of about 100 million shares through an accelerated book-building process at a price of €2.33 per share
• Bayer shares slide 5.2% after the global agriculture and pharmaceutical company’s earnings outlook fell short of estimates due to declining prices for crop products
• Ocado shares drop as much as 10% after the online grocer reported a full-year pretax loss that was bigger than analysts expected
• Adecco shares drop as much as 3.6% following the staffing company’s fourth- quarter results, with analysts highlighting the impact of higher costs and potential for downgrades to consensus estimates
• Travis Perkins shares drop as much as 8.7%, the most intraday since August, after the UK builders’ merchant’s full-year results missed expectations
• Banco Santander shares gain as much as 3.2% after the Spanish lender unveiled a new 2023-2025 plan as it hosts an investor day in London on Tuesday
• Man Group Plc shares surge as much as 11%, their biggest jump since March 2020, after the world’s largest publicly traded hedge fund defied the gloom in the industry
• St James’s Place shares rise as much as 3.8% in early trading after the UK wealth manager’s underlying profit topped expectations
• Worldline shares rise as much as 3.4% as Morgan Stanley raises the French payments company to overweight from equal-weight, saying it offers an “attractive and defensive growth” outlook
• Saipem advances as much as 6.2% before paring some gains as the Italian oil-drilling specialist posted above- consensus guidance for 2023 after fourth-quarter Ebitda beat expectations

Asian stocks were headed for their worst month since September as a repricing of the Federal Reserve’s policy and an evaporating China rally weighed on the region. The MSCI Asia Pacific Index fell as much as 0.5% on Tuesday, driven by consumer discretionary and communication shares. Hong Kong stocks declined the most even as the city said it will end its mask mandate. A late afternoon surge helped Chinese shares close in the green.  The regional stock measure has fallen more than 6% in February, erasing a bulk of January’s advance. Catalysts appear stretched amid concerns over global monetary policy, while China investors await a key meeting of the nation’s political leaders starting this weekend for further clues.

Investors have moved to price in a peak Federal Reserve rate of 5.4% amid elevated US inflation, pressuring riskier assets including those in Asian emerging markets.  “It seems a lot of traders are not confident” as the economy still looks too strong for disinflation trends to resume, Edward Moya, a senior market analyst at Oanda, wrote in a note. ​“The Fed has a lot more work to do and that should be a difficult environment for stocks.”

Japanese equities trimmed earlier gains amid cautious sentiment as investors came to terms with further rate hikes by the Federal Reserve.  The Topix was little changed as of market close Tokyo time, paring most of its 0.4% advance. The Nikkei rose less than 0.1% to 27,445.56.  Services were the biggest boost to the Topix among industry groups. Oriental Land contributed the most to the advance, rising 3.5%.  US Business Equipment Orders Increase by the Most in Five Months “While stocks in Japan rose following US peers, the market is still cautious about the outlook,” said Shogo Maekawa, a global market strategist at JP Morgan Asset Management. “If US economic indicators continue to exceed market expectations and interest rates rise, that will create headwinds for both US and Japanese stocks.”

Australian stocks advanced; the S&P/ASX 200 index rose 0.5% to close at 7,258.40, reclaiming some of Monday’s decline as miners and energy stocks climbed. Even with Tuesday’s advance, the benchmark notched a 2.9% monthly loss. Disappointing earnings results and worries over the Fed’s outlook weighed on the gauge in February. In New Zealand, the S&P/NZX 50 index rose 0.9% to 11,894.58

In FX, the Bloomberg Dollar Spot Index was little changed as the greenback traded mixed against its Group-of-10 peers, and Treasury yields inched up; the British pound is the best performer among the G-10’s, rising 0.1% versus the greenback.  One-month risk reversals in the Bloomberg Dollar Spot Index remain under pressure in the past couple of weeks and point to a bearish correction, yet long-term bets suggest this will be short-lived. Here is the full FX scoreboard:

• The euro swung from a day low of 1.0582 to touch a high of $1.0625 following strong inflation readings from France and Spain. Euro-area bonds slid as traders bet the ECB will raise interest rates to a record high of 4%.
• The pound led G-10 gains, climbing against both the dollar and the euro for a second day as Prime Minister Rishi Sunak’s post-Brexit deal for Northern Ireland provided support. Gilts fell as traders raised tightening bets as much as 5bps, wagering on a 4.89% terminal rate by November.
• The Australian dollar erased Monday’s gain as broad greenback strength outweighed strong local economic data. Australian retail sales rebound, rising 7.5% from a year ago in sign of consumer resilience and keeping pressure on RBA. Bonds held opening gains.
• The yen was among the worst G-10 performers and most Japanese government bonds gained, flattening the yield curve, as concern eased that the BOJ will change its stimulus program any time soon.

In rates, treasuries are slightly cheaper across the curve, following wider losses across core European rates after French and Spanish inflation data surprised to the upside, causing a new wave of hawkish repricing for ECB policy rate. US 10-year yields around 3.95%, cheaper by ~3bp vs Monday’s close, with bunds and gilts underperforming by ~4.5bp and ~1.3bp in the sector; front-end slightly outperforms, steepening 2s10s spread by 1bp on the day. Following France, Spain inflation data, euro-zone front-end repriced for a peak ECB rate of 4% for the first time. Bund futures fell; German 10-year yields are up 6bps on the day while two-year yields climb 8bps.  Focal points of US session include potential for month-end flows and a packed economic data slate.   

In commodities, oil was set for a fourth straight monthly decline as concerns about tighter monetary policy and swelling stockpiles in the US eclipsed optimism about rising demand in China. Crude future advance with WTI rising 1.1% to trade near $76.50; Gold headed for its worst month since the middle of 2021, and on Tuesday fell roughly 0.4% to trade near $1,810.

Looking at today’s calendar, US economic data slate includes January advance goods trade balance and wholesale inventories (8:30am New York time), 4Q house price purchase index and December FHFA house price index and S&P Case- Shiller home prices (9am), February MNI Chicago PMI (9:45am), Richmond Fed manufacturing index, consumer confidence (10am) and Dallas Fed services activity (10:30am). From central banks, we’ll hear from the Fed’s Goolsbee, the ECB’s Vujcic, and the BoE’s Cunliffe, Pill and Mann. Finally, earnings releases include Target.

Market Snapshot

• S&P 500 futures down 0.2% to 3,978.75
• STOXX Europe 600 down 0.4% to 460.78
• MXAP down 0.4% to 157.58
• MXAPJ down 0.4% to 510.36
• Nikkei little changed at 27,445.56
• Topix little changed at 1,993.28
• Hang Seng Index down 0.8% to 19,785.94
• Shanghai Composite up 0.7% to 3,279.61
• Sensex down 0.6% to 58,944.15
• Australia S&P/ASX 200 up 0.5% to 7,258.40
• Kospi up 0.4% to 2,412.85
• German 10Y yield little changed at 2.65%
• Euro little changed at $1.0616
• Brent Futures up 0.7% to $83.02/bbl
• Gold spot down 0.3% to $1,811.43
• U.S. Dollar Index little changed at 104.66

Top Overnight News from Bloomberg

• Incoming Bank of Japan (BOJ) Deputy Governor Shinichi Uchida on Tuesday brushed aside the chance of an immediate overhaul of ultra-loose monetary policy, suggesting that any review of its policy framework could take about a year. RTRS
• Investors and traders continue to ramp up their bullish bets on the yen, with one eye firmly fixed on looming Bank of Japan management changes: BBG
• Ukraine’s head of military intelligence downplays talk of China supplying arms to Russia, saying he saw “no signs that such things are even being discussed”. SCMP
• Apple’s suppliers are likely to shift production capacity out of China far faster than many anticipate given deteriorating relations between Washington and Beijing. BBG
• Euro-area bonds slid and traders bet the ECB will raise interest rates to the highest level on record amid signs inflation in some of the region’s biggest economies is not coming under control. Data showed French and Spanish inflation unexpectedly accelerated to an all-time high in February, spurring money-markets traders to fully price a 4% ECB terminal rate, which would exceed a peak in borrowing costs seen more than two decades ago. That compares to 3.5% expected at the start of the year, with traders now betting the ECB will keep raising rates through February 2024. BBG
• Euro zone inflation pressures have begun to ease, including for all-important core prices, but the European Central Bank will not end rate hikes until it is confident price growth is heading back towards 2%, ECB Chief Economist Philip Lane said. RTRS
• The ECB might hold borrowing costs at a high level for some time once they reach their peak, according to Chief Economist Philip Lane: BBG
• Credit Suisse “seriously breached” risk management obligations in the Greensill affair, the Swiss banking regulator said as it opened enforcement proceedings against four unnamed former managers. Remedial measures include regular executive board-level reviews of key relationships for counterparty risks and recording the responsibilities of its 600 highest-ranking employees. BBG
• META’s new AI-driven Advantage+ tool, designed to overcome Apple’s privacy restrictions, is “significantly boosting the performance of advertising campaigns”. FT
• Chevron rose premarket after it raised its annual buyback rate to $17.5 billion beginning in the second quarter, up from a previously planned $15 billion. BBG
• The Swiss economy unexpectedly failed to grow in the final months of 2022 as manufacturing output contracted and exports weighed on momentum. Separately, Switzerland’s KOF Economic Leading Indicator rose more than economists expected in February, to 100 versus estimate 98.0: BBG
• The BOJ should take time over any future review if it undertakes one, according to deputy governor nominee Shinichi Uchida, a key engineer of the central bank’s easing program: BBG

A more detailed look at global markets courtesy of Newsquawk

APAC stocks eventually traded mixed heading into month-end and despite the early momentum from the positive close on Wall St where risk sentiment benefitted as yields softened amid mixed data. ASX 200 was led by strength in the mining-related industries and after mostly encouraging data releases including a stronger-than-expected rebound in retail sales. Nikkei 225 initially gained amid the upper house confirmation hearings where the BoJ Deputy nominees reiterated the need to continue monetary easing, although the gains were gradually pared as participants also digested mixed data including the largest monthly decline in industrial production in 8 months. Hang Seng and Shanghai Comp. failed to sustain opening advances despite a substantial liquidity injection and reports the White House is scaling back plans to regulate US investments in China.

Top Asian News

• PBoC injected CNY 481bln via 7-day reverse repos at 2.00% for a CNY 331bln net injection.
• White House is scaling back plans to regulate US investments in China with US President Biden expected to forego expansive new restrictions on American investment in China, according to Politico.
• White House gave federal agencies 30 days to ensure they have TikTok bans on federal devices and systems, while it directed federal agencies to adjust contracts to ensure IT vendors keep US data safe by eliminating the use of TikTok on devices and systems, according to Reuters.
• BoJ Deputy Governor nominee Uchida reiterated that the BoJ needs to continue monetary easing for the time being to support the economy and shouldn’t review easy monetary policy just because there are side effects. Uchida added the BoJ will conduct policy flexibly and will firmly continue monetary easing to lay the ground for companies to raise wages, while he added that it is too early to seek an exit from monetary stimulus and that widening the yield target band itself would weaken effects of easing.
• BoJ Deputy Governor nominee Himino said NIRP has negative impacts on financial institutions’ profits and that they must be mindful of the impact to banks from negative rates but the focus now should be on keeping easy policy to support the economy. Himino stated that if conditions fall in place for BoJ to exit easy policy, that would be good for both the public and banks but added that the best approach is to support the economy with easy policy until inflation can achieve the BoJ’s price target excluding the impact of import price increases.

European bourses are mixed/flat, Euro Stoxx 50 +0.1%, as the initial pressure from hot French/Spanish inflation readings has eased through the morning. Sectors, are mixed with Banking/Financial names outperforming as yields lift alongside specific stock updates. Stateside, futures are little changed overall with the morning’s action moving in-tandem with European performance ahead of earnings/Fed speak, ES +0.1% Foxlink, an Apple (AAPL) supplier, will not be able to resume full operations at its India plant for two months following a fire, via Reuters citing sources. Apple could potentially face disruptions in supply chain for iPhones due to Foxlink incident. Chevron (CVX) reaffirms higher returns and lower carbon objectives, lifts share buyback guidance to USD 10-20bln/year; increases targeted annual share buyback rate to USD 17.5bln from Q2. Apple (AAPL) probe by Brussels into the Co.’s restriction of certain apps has been narrowed, according to FT sources. The US is to prevent businesses from using cash for buybacks in the CHIPS Act, according to the Commerce Department; Additionally, cannot make new, high-tech investments in China or other “countries of concern” for at least a decade. A release that is in-fitting with recent press reports.

Top European News

• ECB’s Lane says positive supply shocks since December and rate hikes have curbed inflationary pressures, forward looking indicators for food, energy and goods suggests inflation slowdown. Rate plateau should be held for some time, rates could be in restrictive territory for a number of quarters; hikes to end when it is clear inflation is heading to target.
• Northern Ireland DUP leader Donaldson says the Stormont Break in the Northern Ireland deal at first glance does give Stormont the ability to apply the break. Continue to have some concerns with the deal.
• EIB President proposes a new fund to see off US subsidies, via Der Spiegel; concerned that entire industries will migrate to the US given the subsidies on offer there.

FX

• The DXY is firmer on the session, though remains closer to its 104.57 trough then the 104.90 high, a low that printed in wake of shortlived EUR upside following February flash CPI metrics from France/Spain.
• Specifically, the price points lifted EUR/USD to a 1.0625 peak, though this has proved shortlived as the USD remains resilient and given unfavourable EUR/GBP action as the mood-music re. N. Ireland remains positive, on balance.
• As such, GBP is the G10 outperformer with Cable testing the 1.21 mark vs a 1.2028 base following a favourable face-value take from DUP’s Donaldson; though, sources indicate the parties’ review could potentially take weeks.
• JPY is the G10 laggard given unfavourable yield action and more dovish remarks from the BoJ deputy nominees; USD/JPY at the top-end of 136.12-84 parameters.
• PBoC set USD/CNY mid-point at 6.9519 vs exp. 6.9515 (prev. 6.9572)

Fixed Income

• Debt futures fade after the latest dead cat bounce and curves re-steepen.
• Bunds hit a fresh 132.51 cycle low, Gilts down to 99.38 and T-note retreats within 111-21+/10 range, solid 2025 German auction, albeit after heavy concession helps Schatz pare some losses between 115.52-114.95 parameters.
• JGBs outperform after more dovish testimony from BoJ nominees and decent 2 year sale.

Commodities

• WTI and Brent are firmer on the session and currently reside at the top-end of narrow circa. USD 1/bbl parameters which are just about within Monday’s range, with newsflow limited and the complex seemingly continuing to consolidate.
• Japan plans to emphasise the importance of investments into natgas, LNG, hydrogen and ammonia during its G7 presidency, according to a METI official.
• LME announces immediate suspension of warranting, applicable to LME-listed warehouses located in the US of any new primary aluminium, copper, lead, nickel or aluminium alloy (in form of NASAAC). Currently Russian NASAAC on warrant, 400/T, in LME-listed warehouses within the US. Suspending use of such warrants for use in settlement of LME NASAAC futures.
• Spot gold is a touch softer on the session as initial USD-induced upside has faded as the index moves back into positive territory, albeit only modestly so; more broadly, base metals are mixed given the USD’s resilience and inflation metrics weighing.

Geopolitics

• Kremlin spokesperson Peskov said Russia will not resume participation in START talks until Washington listens to Moscow’s position, while he added that NATO no longer acts as Russia’s conditional opponent but as an enemy.
• Russian Defence Ministry said the US is planning provocation in Ukraine using toxic chemicals, according to TASS.
• Russian domestic flights heading for St Petersburg are reportedly turning around, via Reuters citing a flight radar tracking site; Pulkovo airport has been closed to air traffic, due to an unidentified object with fighter jets responding, via BAZA. Airspace around the airport has subsequently reopened.
• Russian Defence Ministry says Ukraine attempted to attack two Russian regions with drones overnight, via Ria.

US Event Calendar

• 08:30: Jan. Wholesale Inventories MoM, est. 0.1%, prior 0.1%
  • Jan. Retail Inventories MoM, est. 0.1%, prior 0.5%
• 08:30: Jan. Advance Goods Trade Balance, est. -$91b, prior -$90.3b, revised -$89.7b
• 09:00: Dec. S&P CS Composite-20 YoY, est. 4.75%, prior 6.77%
  • Dec. S&P/CS 20 City MoM SA, est. -0.40%, prior -0.54%
  • Dec. FHFA House Price Index MoM, est. -0.2%, prior -0.1%
• 09:45: Feb. MNI Chicago PMI, est. 45.5, prior 44.3
• 10:00: Feb. Richmond Fed Business Conditions, prior -10
  • Feb. Richmond Fed Index, est. -5, prior -11
• 10:00: Feb. Conf. Board Consumer Confidence, est. 108.5, prior 107.1
  • Feb. Conf. Board Present Situation, prior 150.9
  • Feb. Conf. Board Expectations, prior 77.8

Central Bank Speakers

• 14:30: Fed’s Goolsbee Speaks at Community College

DB’s Jim Reid concludes the overnight wrap

Regular readers won’t be surprised to learn that I have a new injury. As soon as I was fit to resume normal activities after my recent back operation I went back to weights. I only do this to be better at golf. In my first couple of sessions back 2 weeks ago, I overdid the bench press and to cut a long story short I now have a rhomboid muscle strain or tear. I’ve stupidly tried to continue playing golf with it and have made it worse. I’m now in a lot of pain and probably out from golf for a few weeks. I come away from it wishing that my mid-life crisis was more skewed towards fast cars, tattoos, or a hair transplant rather than golfing ambitions.

After a rough three weeks for equities, bonds and my shoulder, markets have started this one off in a better mood so far as we hit the last day of the month today. That’s a sixth of the year nearly gone! They have edged higher thanks to a positive round of US data, whilst pricing for the Fed’s terminal rate remained stable after a sustained stretch higher over recent days. This in turn gave markets a clearer run to positively respond to the data across bonds and equities.

Things had looked quite different earlier in the day. In fact, at one point the 10yr Treasury yield reached its highest intraday level since November at 3.977%, before moving lower in the US morning, and ultimately closing -2.9bps lower at 3.914%. In the meantime, expectations of the terminal rate had likewise been on track to hit a new closing high and moved as high as 5.43% intraday, before ending the session little changed at 5.404%.

In risk markets, positive US data without a rates repricing helped, with core capital goods orders up by +0.8% in January (vs. unch expected). On top of that, there was further evidence that housing activity might have bottomed, since pending home sales were up +8.1% in January (vs. +1.0% expected), which leaves the index at its highest level since August. However note that mortgage rates have gone back up in February so we’ll see how strong the nascent housing recovery is.

For equities, the S&P 500 (+0.31%) posted a steady advance led by cyclical and growth sectors. The NASDAQ (+0.63%) outperformed, and the FANG+ index (+1.51%) saw an even larger advance thanks to a solid gain from Tesla (+5.46%) which ended the day as the 4th best performer in the entire S&P 500. Defensives lagged, as bond-proxies such as utilities (-0.77%) and food staples (-0.54%) were the worst performing industries. Meanwhile in Europe, the STOXX 600 (+1.07%) posted a decent broad-based recovery. Every sector of the index was higher, but like with the US, defensives lagged their more cyclical peers.

The exception to the pattern of positive data came from the Dallas Fed’s manufacturing index for February, which came in at -13.5 (vs. -9.3 expected). Notably, there were also increases in the prices paid and prices received components, with both hitting a 5-month high. That topic of inflationary pressures in February is likely to stay in the spotlight today, since this morning we’ve got the flash releases from France, Spain and Portugal, ahead of the Euro Area-wide release on Thursday. Remember that our European economists expect Euro Area core inflation to hit a new record of +5.5%, although they see headline inflation coming down a bit further to +8.4%, which would be a 4th decline since the +10.6% peak back in October.

This concern about inflation meant that European markets performed a bit differently to the US yesterday, with sovereign bond yields rising to fresh highs in several countries. For instance, the 10yr bund yield (+4.5bps) closed at its highest level since 2011, ending the day at 2.582%. And in the UK, the 10yr gilt yields was up +14.6bps to 3.805%, marking its highest level since Liz Truss was still PM back in October. Those moves came as investors continued to price in a more hawkish policy path for the ECB, building on the shift over recent weeks. Indeed, overnight index swaps are now pricing in no rate cuts at all in 2023, and by the December meeting they’re now pricing in +137bps of further hikes.

That repricing of the ECB’s rate path was seemingly endorsed by Croatia’s Vujcic yesterday, who said that the repricing reflected the ECB’s moves, and that markets were right to price in 50bps next time as they’d indicated. He also said that as long as core inflation persisted, then the ECB must persevere. Meanwhile at the Fed, the only major speaker was Governor Jefferson (who previously spoke on Friday), but he offered little new information on the policy side. One thing he did say was that raising the Fed’s inflation target could hurt their credibility, and pointed out that the outlook for core services ex housing inflation (which Chair Powell has said they are following) remained uncertain. Yet in spite of his reiteration of the 2% goal, short-term US inflation expectations continued to move higher yesterday, with the 2yr breakeven (+3.4bps) hitting a fresh 6-month high of 3.088%. In a WSJ interview published yesterday, Cleveland Fed President Mester seemed to imply that the threshold to go back to 50bps hikes would be high. She noted that “this is a different situation now. We’ve already reduced it to 25 (basis points). That’s going to be part of the consideration.” However, she noted that the more pertinent discussion for the FOMC in March will be just how much further the policy rate needs to go.

Overnight in Asia, major benchmarks are trying to catch up with yesterday’s price action in the US, with the Kospi (+0.64%) and the Hang Seng (+0.41%) outpacing the Nikkei (+0.13%) and the Shanghai Composite (+0.07%). US futures are also in the green, led by the Nasdaq 100 (+0.18%) while the S&P 500 is flat (+0.01%). The 10y yield is marginally higher (+1.2bps), mirroring the move in the 2y (+1.5bps).

Back here in the UK, sterling strengthened (+1.00%) after the government reached a deal with the EU over the Northern Ireland Protocol, which has been the most contentious part of the original Brexit deal. In essence, the Protocol was designed to avoid a hard border between Northern Ireland and the Republic of Ireland, but in doing so placed checks on goods moving into Northern Ireland from the rest of the UK, whilst Northern Ireland also remained aligned with the EU single market for goods. This has been opposed by unionists in Northern Ireland, who see the Protocol as placing an economic border with the UK, and the DUP (the largest unionist party there) have refused to enter a power-sharing agreement in Northern Ireland because of it.

When it comes to the new agreement, it removes checks on goods that move from Great Britain into Northern Ireland that remain within the UK. It also enables VAT and excise changes to apply on a UK-wide basis in future, including to Northern Ireland. And a new mechanism was introduced that will allow the devolved Northern Ireland Assembly to decide whether or not changes to EU goods rules affecting Northern Ireland should apply. If this brake is pulled, the UK government would have a veto over the application of a new EU rule. Leader of the DUP, Jeffery Donaldson said his party needed to go over the finer points of the agreement over the next few days, but that “in broad terms it is clear that significant progress has been secured across a number of areas.”

To the day ahead now, and data releases include French CPI for February, Canada’s Q4 GDP, and in the US there’s the FHFA house price index for December, the Conference Board’s consumer confidence index for February, the MNI Chicago PMI for February, and the Richmond Fed’s manufacturing index for February. From central banks, we’ll hear from the Fed’s Goolsbee, the ECB’s Vujcic, and the BoE’s Cunliffe, Pill and Mann. Finally, earnings releases include Target.

A South Carolina state Senator wants to hit new residents with a $500 “Yankee Tax” for moving to the Palmetto state.

The bill, proposed by Sen. Stephen Goldfinch (R), would require those moving to South Carolina from out-of-state to pay two one-time fees; $250 for vehicle registrations and $250 for a new driver’s license. Half of the new fee would go toward the state’s infrastructure – including roads, bridges and common community areas, according to Fox Business.

“I’m not trying to build a wall and this is not a fee against new residents, it’s a fee for people to catch up with the rest of us,” Goldfinch told Fox News Digital. “I think there’s a rational basis for requiring newcomers to catch up with the rest of us and contribute to the roads, bridges, schools and green spaces that we’ve [residents] always contributed to.”

His proposal comes after droves of people from the Northeast have moved to South Carolina in recent years. According to the U.S. Census, nearly half a million people moved to the Palmetto State in the past decade.

People flocked to the Southeast during the pandemic and stayed due to a host of reasons, including work flexibility, lower taxes and warmer weather.

Goldfinch points to South Carolina residents as inspiration for the bill. -Fox Business

“Our quality of life has been diminished by the almost 4 million people that have moved here in the last decade,” said Goldfinch. “And we anticipate another million people moving here in the next decade. Everybody is concerned about their quality of life.”

The new fees will be available for debate next week on the South Carolina Senate floor.

As Fox Business points out, South Carolina isn’t the only state trying to slap people with moving taxes – as California and New York have both proposed legislation to tax people leaving their state.

“If you can charge people to leave, I don’t see any reason why you can’t charge somebody to come in the door,” said Goldfinch.

By Sagarika Jaisinghani, Bloomberg Markets Live reporter and strategist

The strong stock gains that have marked the early months of 2023 are likely to fizzle out if Russia’s war in Ukraine escalates.

While the region’s equities have recovered from declines seen in the immediate aftermath of Russia’s invasion that began a year ago, they are now more vulnerable to shocks after this year’s almost 8% bounce. Any escalation in the crisis will not only stoke geopolitical uncertainty, but also amp up pressure on energy and food prices and weigh on corporate profits.

“It’s clear the market views the risks as lower compared to the beginning of the war, and while elements of the rally are understandable, the margin of safety in European stocks has now been eroded,” says Hargreaves Lansdown lead equity analyst Sophie Lund-Yates. “That means any unexpected escalations or volatility is likely to result in a sharp market reaction.”

Although the optimism this year has been driven by cooling inflation and better-than-expected earnings, the war isn’t far from investors’ minds. Fund managers in a Bank of America Corp. survey see worsening geopolitical concerns as the second-biggest threat to markets, after sticky inflation. Most don’t expect a peace treaty this year.

The polarization between stock winners and losers, coupled with a weaker euro, suggest not all risks have been priced out, says Barclays Plc strategist Emmanuel Cau. The difference between the best and worst-performing groups in the Stoxx 600 is stark: energy shares have soared 20% in the past year, while rate-sensitive real estate companies have slumped 29%.

Among the big risks from here on is a potential energy crunch. While a mild winter helped Europe avert a crisis this time around, stockpiles could dwindle again if the war drags on into the colder months. “The need to replace a historically cheap energy source will remain a challenge,” says Charlotte Ryland, co-head of investments at CCLA.

With the war forcing a shift in governments’ long-term investments, spending on renewables and defense firms may get a boost. UBS Global Wealth Management strategists see opportunities in areas including commodities, green tech, energy efficiency and cybersecurity.

Another sector likely to be disproportionately affected is food and drinks, where supplies of some items have been disrupted in the past year. Bloomberg Intelligence strategists Tim Craighead and Laurent Douillet say profitability of the food industry “faces a potentially long-term test” as restricted supplies of key Ukrainian sunflower, oil, corn and wheat add to a rise in prices.

Economically sensitive sectors are also at risk of reversing an outperformance against so-called defensive peers if the war escalates. All in all, the outlook for European stocks is getting dimmer, with strategists in a Bloomberg poll expecting the Stoxx 600 to end the year below current levels on deteriorating economic momentum.

Citigroup strategist Beata Manthey expects geopolitical risks to keep a lid on European equity valuations as the boost from lower gas prices, a weaker dollar and China’s reopening is now priced in. “As for the rally, we wouldn’t be chasing it from here,” she says.

Environmental, social, and governance (ESG) has been a hotly debated topic over the last few years.

The seemingly unquestioned march towards corporate utopia has met with resistance among those who oppose the idea that government oligarchs should dictate the affairs of private business firms. The long-term effects of the ESG movement are largely ignored by the mainstream.

As Tom Czitron previously commented, ESG is largely justified on the basis that corporations and financial institutions should be socially responsible. They should work obsessively to address the perceived menaces of climate change, racism, sexism, and a host of subjects. Our benevolent political and economic elite define what is virtuous and what is not for a grateful public.

But, as of late, there are some naysayers that dare to stand up to the socialism-by-stealth promoters with Tim Buckley, chief executive at Vanguard, perhaps the biggest name yet to buck the ESG orthodoxy.

“Our research indicates that ESG investing does not have any advantage over broad-based investing,” Mr. Buckley said in a recent interview with the Financial Times.

Matching word to deed, his comments came after he had withdrawn his firm from the $59 trillion Net Zero Asset Managers initiative, an organization that is part of the $150 trillion United Nations-affiliated Glasgow Financial Alliance for Net Zero.

“We don’t believe that we should dictate company strategy,” he said, in his first public comments about the decision.

“It would be hubris to presume that we know the right strategy for the thousands of companies that Vanguard invests with. We just want to make sure that risks are being appropriately disclosed and that every company is playing by the rules.”

As The Wall Street Journal reports, Mr. Buckley effectively claims that ESG managers are playing the fool and taking their clients’ money with them.

Fewer than 1 in 7 active equity managers outperform the broad market in any five-year period. Over the past five years, not one relied exclusively on a net-zero investment methodology. 

Betting his clients’ money on politicians and regulators consistently doing the “right” thing would be irresponsible.

There is a receding chance the globe will be at net zero by 2050. No one should promise to base his entire investment strategy on such odds.

The Vanguard boss also warned investors not to expect superior returns from ploughing money into ESG funds and alternative assets – two of the fastest growing parts of the asset management industry – rather than the index-trackers championed by his firm.

“We cannot state that [environmental, social and governance] investing is better performance wise than broad index-based investing,” said Buckley.

“Our research indicates that ESG investing does not have any advantage over broad-based investing.”

The decision to withdraw from the coalition has sparked fury among environmental activists, with Al Gore calling Mr. Buckley’s decision “irresponsible and shortsighted.”

Buckley, however, said, as The FT reports, that Vanguard was “not in the game of politics”.

“Politicians and regulators have a central role to play in setting the ground rules to achieve a just transition to a lower carbon economy,” he said, when asked about the increasing politicisation of ESG investing.

As Terrence Keeley writes in an op-ed via WSJ, freeing the asset-management industry from a prevailing orthodoxy that promises wealth and environmental sanctity while delivering neither requires monumental fortitude.

Authored by Tsvetana Paraskova via OilPrice.com,

• The new head of Offshore Energies UK has warned that the higher tax rates are already hitting offshore companies hard.

• Last autumn, the UK raised the windfall tax for oil and gas operators to 35%, bringing the oil and gas sector’s total tax rate to 75%.

• Companies are already slashing investment in the UK energy system, which could leave the UK increasingly dependent on imports.

The windfall tax on UK North Sea producers is hitting all companies operating on the UK Continental Shelf with firms already announcing lower investments and deferring drilling plans, the new head of trade body Offshore Energies UK (OEUK) has warned.

Last autumn, the UK raised the windfall tax on the profits of oil and gas operators by 10 percentage points to 35% from January 1, 2023.

The UK also extended the so-called Energy Profits Levy to the end of March 2028, from December 31, 2025, as originally planned when the levy was 25%.

The total tax rate on the oil and gas sector has thus increased to a massive 75%, the highest of any UK sector, OEUK says.

The “super tax is hitting all offshore companies hard, large and small, not just those who make headlines,” OEUK’s new chief executive David Whitehouse told the Financial Times.

Operators in the UK are already looking to invest elsewhere which would leave the country increasingly reliant on fossil fuel imports, Whitehouse noted.

After the windfall tax was raised, Harbour Energy, the biggest oil and gas producer in the UK North Sea, backed out of the ongoing licensing round aimed at awarding more than 100 new licenses. Shell has said it would be re-evaluating each project comprising its $30.5 billion (£25 billion) planned investment in the UK energy system, and TotalEnergies has said it would slash its investment in the UK by 25%.

In its latest operational update, Harbour Energy said in January that its total UK capital expenditure was reduced compared to previous expectations with certain opportunities no longer being pursued following the changes to the Energy Profit Levy (EPL).

“While oil and gas prices have reverted to more normal levels we still face a tax rate of 75 per cent in the UK due to the recent tax changes, making investment in the country less competitive,” Harbour Energy’s CEO Linda Cook said.

“As a result, the EPL necessitated a review of our future activity levels in the UK and reinforced our ambition to grow and diversify internationally.” 

Commenting on calls for more taxes after Big Oil’s record profits for 2022, Mike Tholen, OEUK’s director of sustainability, said early this month, “That rate of UK tax is already so high it risks driving companies out of UK waters. All parties have acknowledged that we will need oil and gas for decades to come. So why risk damaging our own secure supplies from the North Sea?”

A newly unearthed interview along with declassified documents point to CIA involvement in the 1962 arrest of anti-apartheid leader Nelson Mandela by the US-friendly apartheid government. At that time, the height of the Cold War, Mandela was seen as part of the Communist opposition.

Time magazine in a new bombshell report asks the question, “Did the CIA Betray Nelson Mandela?” and comes to the conclusion that there was pivotal involvement of America’s most powerful spy agency. 

The details are coming to light based on the work of Richard Stengel, collaborator on Mandela’s autobiography, “Long Walk to Freedom“. Stengel revisited an unpublished 1993 audio interview he had captured with Mandela, wherein the famous anti-apartheid activist and eventual South African president told him he had learned that an American consul with CIA connections had briefed South African authorities on Mandela’s travel habits.

This would help lead to Mandela’s arrest and imprisonment for 27 years as head of the outlawed African National Congress (ANC). Additionally now declassified CIA documents had labeled Mandela “probably communist” and confirmed that the agency had been closely tracking him anytime he went out of South Africa.

This was during the presidency of John F. Kennedy. According to Axios, “Taken together, Stengel says, the details add significantly to the evidence that the CIA was tracking Mandela and helped South African authorities arrest him as he was traveling from Durban to Johannesburg in 1962.”

And according to further details revealed in the Time report: 

• A Johannesburg Star story in 1986 cited a “retired senior police officer” saying South African police had been tipped off to Mandela’s whereabouts by a U.S. diplomat in Durban who was “the CIA operative for that region.”

• Four years later, the Atlanta Journal-Constitution reported that a “retired [American] intelligence official” identified a “senior CIA operative” as giving South Africa every detail about Mandela’s whereabouts.

The details are also consistent with how the US government classified Mandela and his African National Congress throughout the 1980s and 1990s. 

Despite US officials and media now praising his civil rights legacy as a unifier, the reality is successive US administrations considered him a “terrorist” and actively opposed him and his racial equality movement. 

A 2013 NBC report pointed to the historical irony and hypocrisy of US officials as follows: “Until five years ago, however, the U.S. officially considered Mandela a terrorist. During the Cold War, both the State and Defense departments dubbed Mandela’s political party, the African National Congress, a terrorist group, and Mandela’s name remained on the U.S. terrorism watch list till 2008.” And more from the report: 

But in 1986, Reagan condemned Mandela’s group, the ANC, which was leading the black struggle against the apartheid regime, saying it engaged in “calculated terror … the mining of roads, the bombings of public places, designed to bring about further repression.”

In a word? Yes.
And of course.

US foreign policy and its intelligence infrastructure aligned with the apartheid regime for decades. It was US civil society that turned it around with mass civil disobedience and boycotts.
This by ⁦⁦@stengel⁩ https://t.co/RekkTsnd9T

— Patrick Gaspard (@patrickgaspard) February 27, 2023

There’s long been speculation that the CIA played a key role in Mandela’s capture and imprisonment, but more and more details are still being proven, also as three-decade old intelligence files come up for periodic declassifications. He was South Africa’s first black head of state starting in 1994, and died in 2013 at the age of 95.

Authored by Steve Watson via Summit News,

Camilla, the Queen consort of the United Kingdom, and wife of King Charles, has surprised some by urging authors and writers to resist censorship, amid an enhanced effort to edit and rewrite classic works of literature to remove anything deemed ‘offensive’.

Speaking at Clarence House in London last week, Camilla said “thank you, on behalf of book lovers and book clubs everywhere, for sharing your talents with us and for everything you do to promote literacy and a love of literature.”

Camilla has launched a new charity, The Queen’s Reading Room, aimed at promoting “the appreciation of literature among adults and children”.

Addressing authors directly, she added “Please keep doing so and please remain true to your calling, unimpeded by those who may wish to curb the freedom of your expression or impose limits on your imagination. Enough said!”

Camilla continued, “let there be no squeaking like mice about your achievements, but only roaring like a pride of lions.”

Watch:

Camilla called on her guests of leading authors to “please remain true to your calling, unimpeded by those who may wish to curb the freedom of your expression or impose limits on your imagination. Enough said!” pic.twitter.com/xBnKB78fG6

— Roya Nikkhah (@RoyaNikkhah) February 23, 2023

As we have highlighted, this all stems from an ongoing move to have ‘sensitivity readers’ highlight and purge anything that is deemed ‘offensive’ from classic literature.

Both Roald Dahl and Ian Flemming’s estates appear to have okayed this.

Digital Versions of Roald Dahl’s Books Already Updated to Include “Sensitivity” Changes

Report: James Bond Books Being Rewritten To Remove ‘Racist And Sexist’ Remarks

Imagine taking everything non-woke out of James Bond. What will be left over?

In the most ironic of twists, George Orwell’s 1984 has also been touted as a candidate to be rewritten:

*  *  *

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If Tesla’s new plant in Germany is any indication, not only is demand not a problem, but the company is moving along efficiently and firing on all cylinders. 

The company’s new plant in Brandenburg has reportedly “reached an output of 4,000 cars per week”, according to Bloomberg this week. The milestone is three weeks ahead of planned schedule for the new production facility, according to a production plan Bloomberg reviewed. 

Volume from the new plant amounts to about a third of Tesla’s Model Y production in Shanghai. The company’s Model Y was the last new model to be released, in 2020. The Cybertruck is next, and deliveries might not begin until late 2023 or early 2024. 

We will also continue to look for more details as to whether or not Germany will be involved in producing Tesla’s new subcompact car, which we wrote about just hours ago. We noted that a corporate video released by Tesla for the opening of its new engineering headquarters in California might have leaked design drawings of its upcoming new electric compact car. 

The original idea for an affordable Tesla was announced by Elon Musk back in 2020:

“Tesla will make a compelling $25,000 electric vehicle that is also fully autonomous,” Elon Musk said at the time. 

After an ugly start to the 2023 campaign, Tesla shares have now more than doubled off their lows this year. The company has seen price cuts spur demand in large markets like China, as well. We wrote in the beginning of February that the company’s China segment shipped 66,051 vehicles in January.

That figure was up 18% from December, while China’s new energy passenger vehicles, in total, were down 45% month over month from December to January. The company is now reportedly planning to increase output at its Shanghai plant – bringing its run rate back toward where it was in September 2022 – in order to continue meeting the demand from price cuts on its best selling models. 

We’ll continue to keep an eye on Germany as it spools up as well. 

Authored by Thomas Brooke via Remix News,

It follows a trend being witnessed across northern Europe following years of mass migration from predominantly Muslim countries…

Muhammad became the most popular boy’s baby name in the Irish city of Galway last year, data published on Friday by the Central Statistics Office (CSO) revealed.

It is the first time the popular Islamic name has topped the list of baby names in an Irish city, and follows the trend of the U.K. and other European nations that have seen the name top the charts in recent years.

Jack and Noah dominated in other Irish counties, while James made up the top three. All three names retain their places in the top three from last year.

The most popular baby names by city and county in 2022.

See the national ranks in the Irish Baby Names 2022 release: https://t.co/ROehZXYnt4#CSOIreland #Ireland #VitalStatistics #VitalStats #Births #IrishBabiesNames #BoysNames #GirlsNames #babynames pic.twitter.com/YklMFui0bD

— Central Statistics Office Ireland (@CSOIreland) February 24, 2023

Emily, Grace, and Fiadh made up the top three most-popular girl’s names across the country.

The city of Galway can be viewed as something of an anomaly with Muhammad placed 86th in the nationwide ranking, although the name has grown in popularity and is up from 109th in 2021.

The different variations of the spelling can often conflate data, with Muhammed, Mohamed, and Mohammed all being acceptable alterations of the name, along with several others.

Mohammad has been the most popular boy’s baby name in the U.K. for the past six years, while it was the second-most popular name in the Netherlands last year.

It was also by far the most popular name for baby boys in the Belgian capital of Brussels last year and has also topped the chart in Berlin, the Parisian suburbs, and the Swedish city of Malmo in recent years.

The French civil registry reported in 2021 that at least 20 percent of all babies born in France were being given Islamic first names, and the true figure could be closer to 25 percent.