Wednesday Morning Reads
- Janus Henderson will be against Zendesk (ZEN) deal to acquire Momentive Global (MNTV). Reuters
- Sony (SONY) making more older PlayStation models in response to shortages. Bloomberg
- Constellation Brands (STZ) Mexico plant might result in new $2.6 bln investment after dispute. Reuters
- Didi (DIDI) facing challenges related to Hong Kong IPO. FT
- DirectTV (T) and Dish Network (DISH) are in M&A talks. NY Post
- Cannabis compounds prevented coronavirus infection in new study (TLRY, CRON, CGC, CURLF, GTBIF, CURLF, ACB, HEXO). Bloomberg
- White House considering offering KN95 masks to all Americans (MMM, APT). Politico
- Exxon (XOM) to sell some shale assets. Reuters
- Pardes Biosciences (PRDS) to spend some money developing COVID-19 treatment. WSJ
Another bad inflation report is on tap this morning, with consumer prices expected to have jumped 7% in December from a year ago. That would be the eighth straight month of a figure higher than 5%, and the third consecutive month above 6%. It would also represent the biggest annual increase since February 1982, while core CPI, which excludes food and energy and is the Fed's preferred gauge of inflation, is even forecast to rise 5.4% Y/Y.
Eyes on Powell: In his confirmation hearing on Capitol Hill on Tuesday, the Fed Chair emphasized that he will use all the tools of the central bank to get inflation back on track. "If we have to raise interest rates more over time, we will," Powell told the Senate Banking Committee. "The economy no longer needs or wants the very accommodative policies we have had in place." He also expressed hope that the alleviation of supply chain bottlenecks would bring inflation down, as the economy returns to "normal supply conditions," but admitted that it has taken much longer than expected to get the problems under control.
The price pressures could also impact the other side of the Fed's dual mandate, or "maximum sustainable employment." "To get the kind of very strong labor market that we want with participation, it's going to take a long expansion. To get a long expansion, we're going to need price stability," Powell explained. "In a way, high inflation is a severe threat to the achievement of maximum employment and to achieving a long expansion that can give us that."
Take a look: Investors will be analyzing the CPI industry breakdown, parsing the report for evidence that inflation is picking up in broader swathes of the economy like the services sector, and not just areas affected by supply chain issues. "Today, economists test their ability to forecast the price of a used 2000 Honda Civic," noted UBS chief economist Paul Donovan. "There are other prices in the U.S. economy, but if you want to understand U.S. CPI, it helps to know what used car prices are doing." Other notable categories of the report to watch include rent and shelter costs, transportation, and medical care.
An interesting dynamic played out in the market yesterday as Powell delivered his testimony to the Senate Banking Committee. Many of the expensive tech names recharged, with the Nasdaq closing the day up 1.4%, as investors heard comments that inflation would probably ease by the middle of this year. Others discounted the outlook, citing Powell's infamous "transitory" call from 2021, and said traders were rushing in to buy the dip despite the Fed taking away the punch bowl.
Analyst commentary: "The pullback in risk assets in reaction to the Fed minutes is arguably overdone," J.P. Morgan's Marko Kolanovic wrote in a note to clients. "Policy tightening is likely to be gradual and at a pace that risk assets should be able to handle, and is occurring in an environment of strong cyclical recovery."
Also sticking to the gradual stance was Ian Lyngen of BMO Capital Markets. "Powell noted that the balance sheet runoff will occur later in 2022 and that 'it's a long road back to normal.' On net, the Chair’s comments are consistent with a willingness to deliver the liftoff hike in March assuming there isn't a dramatic reversal in the pace of consumer price gains."
The other camp: Those that are more gloomy on risk assets are calling the comeback a dead cat bounce, or that outsized leverage can produce strange reactions (little jumps can be magnified by the covering of short positions, etc.). Those subscribing to the most dire of bubble forecasts also point out that the burst happens in stages, like the dotcom bubble, which saw many session rallies as the Nasdaq dropped from 5,000 to below 1,000 between 2000-02. "The things that performed the best since March of 2020 are going to probably perform the worst in this tightening cycle," declared billionaire hedge fund manager Paul Tudor Jones.
Weekly oil stockpiles data from the Energy Information Administration are set to be released at 10:30 a.m. today, and if they confirm a drop, it would be the seventh straight fall in inventories. What's happening is that U.S. consumption, as well as production, is making a sharp reversal from the pandemic economic downturn, and is now expected to break pre-COVID records next year, according to the EIA. Output is estimated to rise to a fresh annual high of 12.4M barrels per day in 2023, topping the previous record volume of 12.3M bpd set in 2019, and U.S. is even poised to become the world's largest exporter of liquefied natural gas.
Snapshot: Many U.S. energy giants, like ConocoPhillips (COP) and Pioneer Natural Resources (PXD), have recently pivoted from a strategy of maximizing output and exploration towards pleasing shareholders with dividends, buybacks and diversifying their businesses. They're under a lot more pressure on the regulatory and environmental side than smaller producers, which are expected to lead the next wave of production. West Texas Intermediate is now trading above $81/bbl after rising 3.8% yesterday for its biggest daily surge this year.
"There are a lot of supply factors and omicron fears are ebbing," said Howie Lee, an economist at Oversea-Chinese Banking Corp. "The market will remain tight for a while. Wherever the market is right now has just started to reflect oil’s fair value and there is still more to run."
Go green? The latest figures come despite a promise from the Biden administration to shift away from fossil fuels. It has even leaned on the domestic oil sector to lift output to help tame energy prices, which rose last year to their highest levels since 2014. Moreover, emissions soared 6.2% in 2021 and are forecast to rise by another 1.8% and 0.5% over the next two years to 4.97M metric tons, though total emissions still sit below 2019 levels.
As unionization drives heat up across the nation, one important battle is getting a do-over. A second high-stakes election has been set for Amazon's (NASDAQ:AMZN) warehouse in Bessemer, Alabama, known as BHM1, after 71% of workers there voted against joining the Retail, Wholesale and Department Store Union (RWDSU) last April. While union supporters have sought better work conditions and benefits, many voters didn't feel a union would improve that situation, according to interviews.
At play: The National Labor Relations Board (NLRB) ordered another vote after finding Amazon improperly interfered and broke labor laws in the first election. Among the violations was the improper polling of workers' support for the union during mandatory company meetings, as well as a decision to install a mailbox at the facility, which gave a false impression that Amazon was conducting the election and could have intimidated workers.
Ballots for the coming election will be sent to workers on Feb. 4, and the votes will be tallied on March 28. While both Amazon and the RWDSU don't like the idea of a mail-in election, NLRB Region 10 Director Lisa Henderson said that such a ballot is "the safest and most appropriate method of conducting a prompt election in view of the extraordinary circumstances presented by the pandemic." Both sides will also be prohibited from putting up a tent, banner or sign around the ballot drop box or make any kind of "statement to voters concerning use of the box for the purposes of this election."
Go deeper: While labor unions have organized some of Amazon's workforce in Europe, no American facility has yet successfully formed or joined a union. Amazon is concerned that a union win - similar to the first victory seen at Starbucks (SBUX) in December - would disrupt the company's control over employees, like the pace of work and hourly wages. The campaign resurgence in Alabama could also advance existing union drives in the U.S., with Amazon workers filing for an election in Staten Island, as well as other efforts like Amazonians United Chicagoland.
In Asia, Japan +1.9%. Hong Kong +2.8%. China +0.8%. India +0.9%.
In Europe, at midday, London +0.7%. Paris +0.5%. Frankfurt +0.3%.
Futures at 6:20, Dow +0.1%. S&P +0.1%. Nasdaq +0.4%. Crude +0.6% at $81.74. Gold flat at $1817.80. Bitcoin +2.6% to $42804.
Ten-year Treasury Yield unchanged at 1.74%
Today's Economic Calendar
7:00 MBA Mortgage Applications
8:30 Consumer Price Index
10:00 Atlanta Fed's Business Inflation Expectations
10:30 EIA Petroleum Inventories
1:00 PM Fed's Kashkari: U.S. Economic Outlook
1:00 PM Results of $36B, 10-Year Note Auction
2:00 PM Treasury Budget
2:00 PM Fed's Beige Book
What else is happening...
Germany's new tool for 2030 climate goals: Stop using energy.
Bank of Amer