Lessons from the 1970s

Reuters

Lessons from the 1970s

2023年2月9日，上午9:20GMT

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STOXX 600 up 1.1%

German inflation dips

Takeover talk boosts StanChart

U.S. stock futures rise

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LESSONS FROM THE 1970S (1102 GMT)

Inflation finally appears to be cooling off. Data released from Germany on Thursday showed EU-harmonised consumer prices rose by 9.2% in January, down from 9.6% in December and below expectations of 10%.

In the U.S., headline CPI has fallen from a peak of 9.1% in June last year to 6.5% in December. January data, released next week, could well show annual inflation slowed further last month.

"Our models suggest it will continue downward. Fast," says Henry Neville, portfolio manager at Man Solutions, who expects headline CPI to reach 2% this year.

However, as Neville points out, if inflation is not under control, then there's always a possibility it'll rear its head once again and inflationary waves similar to the 1970s could become more commonplace.

"Inflation is like the Terminator chasing Sarah Connor," he says. "Until it's completely destroyed ... it will keep coming back."

Neville says to really end inflationary waves similar to those observed in the 1970s, then U.S. interest rates would need to peak closer to 9% as is today implied by the Taylor Rule. This is well above market pricing for peak rates of around 5%.

One of the lessons from the 1970s, according to Neville, is that even though high inflation decades are, overall, not good times to hold equity risk, the periods in between the waves can deliver very strong returns.

"A period of disinflation is generally a time when the market rallies," Neville says.

"We continue to see the next couple of quarters as being risk-positive, and expect stocks to continue to climb the wall of worry."

(Samuel Indyk)

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THE GERMAN INFLATION BRAIN TEASER (1051 GMT)

Germany's lower-than-expected headline inflation offers some relief to the fixed-income market, but analysts are having trouble assessing the outlook.

"The methodological uncertainty around the inflation figures for December 2022 and January and February 2023 is much higher than usual," says Salomon Fiedler, an economist at Berenberg.

"The government is intervening heavily in household energy markets, but it is, a priori, unclear to which extent this will show up in the data collected by the statisticians," he adds.

German consumer prices rose by 9.2% in January.

"The energy price cap will come into effect as of 1 March but will be paid retroactively," ING analysts note.

"According to Bundesbank estimates, energy price caps and cheap public transportation tickets will lower average German inflation by 1.5 percentage points this year," they say.

And there is more. "Negative base effects from last year's energy relief package for the summer months should automatically push up headline inflation between June and August," they add.

Bottom line, according to Citi analysts, "today's data does not yet necessarily imply that core or underlying inflation is on a lower path, nor that the surprise is persistent."

(Stefano Rebaudo)

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STOXX: ACTION-PACKED START (0936 GMT)

There was no lack of action at the open today in Europe with corporate dealmaking, earnings reports and a softer-than-expected inflation print in Germany sparking broad-based gains and pushing indices to fresh highs.

Well-received numbers from drugmaker AstraZeneca AZN.L drove the FTSE 100 .FTSE to a new lifetime peak, up 1.1%.

Also helping was a spike of over 10% in StanChart STAN.L after a Bloomberg reported that First Abu Dhabi Bank is still considering a potential offer for the UK bank. On the downside, Entain ENT.L slumped 10% after U.S-based MGM Resorts said it was no longer from pursuing an offer for the gambling firm.

The STOXX 600 .STOXX meanwhile rose 0.8% to a fresh 10-month high, although gains were capped by some disappointing updates from Delivery Hero DHER.DE and GN Store Nord GN.CO.

In banks, Credit Suisse CSGN.S saw its worst annual loss since 2008, sending its shares down 6%. Credit Agricole posted strong numbers, pushing its shares higher.

(Danilo Masoni)

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EUROPEAN SHARES SET FOR POSITIVE START (0737 GMT)

Shares in Europe are expected to rise this morning, tracking a bounce in U.S. futures and following data showing German inflation rose by a less than anticipated 9.2% in January, which could ease pressure on the ECB to keep raising rates.

EuroSTOXX 50 STXEc1 and FTSE FFIc1 futures are up 0.6% and 0.3%, respectively, and S&P 500 ESv1 contracts added 0.4%.

On another heavy day in Europe's earnings season, eyes are on Credit Suisse. The Swiss bank posted its worst annual loss since 2008 and warned that a further "substantial" loss would come this year. Its shares were down 4.7% in the premarket.

On a more upbeat note, Credit Agricole CAGR.PA posted a higher-than-expected profit, driven by lower loan provisions and a strong performance at its investment banking division.

In the UK, Unilever ULVR.L reported quarterly underlying sales growth above expectations and AstraZeneca AZN.L posted fourth-quarter revenue just shy of analyst estimates.

(Danilo Masoni)

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(Danilo Masoni)

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BAR-DUH (0656 GMT)

Surely the most fun story today, unless you are an Alphabet shareholder, is Google's new Bard AI flunking a question on the James Webb telescope. And it was an own goal given the error was in a Twitter video put out by Google itself, ouch.

Alphabet's shares sank almost 8%, wiping a cool $100 billion off its market cap, and dragging all of Wall Street down. But it did produce one of our best headlines of the session: "Alphabet's Bard apparently no Shakespeare." Eat your heart out AI.

There's been scant fun in Asian markets with everyone already stressing about next week's U.S. CPI report and what that will mean for the likely peak of Fed rates.

In Europe, the Riksbank meeting will be interesting if only because both the governor and deputy are new to the roles, so there's no knowing if the central bank's reaction function has changed.

Markets are priced for a half-point hike to 3.0%, in part to match the ECB and stop the SEK from weakening yet further. It's been falling steadily on the euro since late 2021, making it all the harder to fight inflation.

Assuming it goes 50 bps, and not 75 bps, the focus will be on the outlook for further tightening. Markets are fully priced for a move to 3.25%, with 3.5% an even bet. 0#RIBA

If this week's hikes by central banks in India and Australia are anything to go by, the risk is for a hawkish outcome in Sweden.

Further out, JPMorgan analysts note household debt in Sweden is twice the EU average making it tough for the Riksbank to keep a half-point spread over ECB rates.

"Monetary policy in Sweden is clearly more restrictive than in the Euro-area," they say. "If the ECB therefore ends up with a 3.25% terminal rate (our forecast), we think the Riksbank will not be able to follow suit and take the policy rate to 3.75%."

There are blessedly no Fed speakers today, but Bank of England Governor Andrew Bailey will be grilled by lawmakers - among the few people in the country not on strike - about its recent rate rise and the ever-growing risk of recession.

The BoE line has been they may have done enough, but are not sure and are ready to do more if needed.

Key developments that could influence markets on Thursday:

- Riksbank rate decision and Feb monetary policy report due at 0830 GMT. Governor Erik Thedéen and Jesper Hansson, head of the Monetary Policy Department hold presser at 1000 GMT

- BoE Governor Bailey speaks to lawmakers at 0945 GMT

- The delayed German Jan CPI is due at 0700 GMT and could cause fireworks if stronger than the forecast 8.9% y/y

(Wayne Cole)

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