After starting the day in a positive fashion, European markets rolled over into the red, finishing a negative week on a sour note, after a hotter-than-expected US core PCE inflation print, which sent both the US dollar and yields surging.
Europe
Today’s US inflation numbers also killed stone dead any prospect of a Fed pause in rate hikes any time soon, with markets now pricing in another three 25bps rate increases at the March, May, and June Fed meetings.
Basic resource stocks have borne the brunt of today’s weakness with the stronger US dollar sending metals prices lower, along with mining stocks, led by Anglo American and Rio Tinto, helping to drag the FTSE100 below the 7,900 level.
On the earnings front, British Airways owner IAG’s Q4 and full-year numbers were eagerly awaited given that airlines have been among one of the best-performing sectors year to date. This outperformance has been predicated on optimism that as we head into 2023, consumers will start splashing what available cash they have on holiday getaways in what looks set to be the first year since covid that won’t be subject to widespread disruption.
In Q3 IAG returned to profit helped by a recovery in business travel, which has recovered back to 75% of 2019 levels. For Q4 revenues came in at €6.39bn, down from €7.33bn in Q3, however, profits came in at €232m.
Full-year revenues came in at €23.06bn, with the airline returning a small profit for the year of €431m, a significant improvement on last year’s €2.93bn loss.
The shares got off to a promising start, however, the early gains in the share price quickly encountered turbulence and fell sharply over concerns about the airline’s debt levels, which only saw a modest decline to €10.38bn, and which aren’t expected to fall in 2023, due to extra capex spending of €4bn.
For 2023 IAG says it expects to full-year operating profit to be in the range of €1.8bn to €2.3bn, a significant step up from this year's €1.25bn, although in Q1 they expect to see a modest loss of €200m.
The airline said it intends to complete the acquisition of the rest of Air Europa for €400m. In terms of capacity, IAG says it expects to be back at 98% of 2019 levels in 2023, with Q1 set to rise to 96%, numbers which still look optimistic.
On the upside, Rolls-Royce shares have picked up where they left off yesterday with further strong gains after yesterday's return to profit, and a more upbeat outlook, along with the strategic review which is due to complete at the end of H1.
BAE Systems is also building on the gains made yesterday as the war in Ukraine enters its second year.
We’re also seeing big gains in M&G although it’s not immediately apparent as to the reasons why despite a significant increase in daily volume.
US
US markets opened sharply lower after consumer spending and core PCE inflation surged in January, sending US 2-year yields through 4.8% for the first time since 2007.
Today’s numbers were always likely to be a key test for the markets given the increasing focus on core prices, and away from headline inflation which has been falling steadily, and so it has proved after January PCE Core deflator jumped to 4.7% while the December number was also revised higher to 4.6%. Consumer spending also jumped sharply to 1.8%, which shouldn’t have been too surprising given that we already knew retail sales jumped by 3%.
The Nasdaq 100 has led the declines, with falls for the likes of big tech. On the earnings front Beyond Meat, shares have seen a decent rally today after beating on Q4 sales, which came in at $80m, which is still a fall of 21% from a year ago. Losses narrowed to $66.9m for the quarter or $1.05c a share. The company said it was still struggling with price cuts in the US and Europe which were hindering its ability to cut costs. Beyond Meat has already reduced its headcount by 200 in October last year. As for H1 the company was cautious about price inflation but was optimistic about H2.
Warner Bros Discovery the owners of CNN, has seen their shares fall back after posting a bigger than expected Q4 loss of -$0.86c a share. The company blamed a fall in advertising revenues for weaker than expected $11bn, while total subscribers came in at 96.1m below forecasts of 96.3m. The main reason for the bigger-than-expected loss was due to one-off costs associated with the integration of the two brands in last year’s merger.
Boeing shares are also under pressure after the company temporarily halted deliveries of its 787 Dreamliner, due to concerns over a fuselage component.
FX
The US dollar surged higher across the board, after US core PCE inflation in January unexpectedly jumped to 4.7%, with the biggest move coming against the Japanese yen after new Bank of Japan governor-elect Ueda said that there was no rush to remove yield curve control and that there was a need to continue with monetary easing. Ueda did go on to acknowledge that Japan was no longer in a deflation state which suggests that a policy shift might not be far off, but for now, it would appear there is little prospect of a policy shift in the short term. In conjunction with today’s hot inflation number, the greenback has swept all before it today.
The pound has also come under pressure, slipping below 1.2000, despite an improvement in February Gfk consumer confidence, albeit from previous record lows.
Commodities
The continued rise in yields along with the strength of the US dollar has seen gold prices weaken further falling to their lowest levels this year.
Crude oil prices which were trending higher in the lead-up to the inflation numbers fell back sharply in the aftermath of the numbers, on concerns that higher rates for longer will mean that the global economy will see a marked slowdown as we head further into 2023.
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