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The Week Ahead
After a very heavy week full of catalysts from the economic to the Fed (and other central banks) to the market (earnings) to the political, all will continue to move markets in the upcoming week, although their weights will likely shift a bit with earnings taking a step down from the heaviest week of the quarter and just the Bank of England with a major policy decision in the upcoming week.
In terms of US economic data, we get all of our standard first week of the month reports headlined by Jan Nonfarm Payrolls on Friday, and this one comes with the extra spice of the final annual benchmark revision for 2024. As a reminder the preliminary (through March) reduced the first 3 mths by 68k jobs/mth on average. It is expected to be less than that, but still should be a sizeable reduction. But before we get there, we have a host of other key reports in Dec JOLTS, Factory Orders, Construction Spending, and Consumer Credit, Jan PMI’s, ADP, and Auto Sales, Feb prelim UMich consumer sentiment, Q4 Productivity/Unit Labor Costs and Senior Loan Officer Survey, and weekly jobless claims, mortgage applications, and EIA petroleum inventories.
In terms of the Fed, with the blackout window lifted, we’ll get a heavy dose of speakers. BoA has regional Fed Pres’s Bostic, Musalem, Daly, and Goolsbee, and Gov Waller, and Bloomberg adds Gov’s Bowman, Kugler, and Jefferson, and there’s always more.
No non-Bill (>1yr in duration) Treasury auctions this week, but we’ll get a headline event in the Treasury market still with the US Treasury releasing its borrowing estimate for Q1 on Monday and the QRA (schedule for auctions) on Wednesday. Given the incoming US Treasury secretary Bessent seems to be one of the adults in the room, I wouldn’t expect him to make any waves, particularly given his boss is making plenty already, but you never know with these things I guess. That’s BoA’s expectation also, but that said, there’s also the guidance, particularly as it’s expected at some point this year auction sizes will need to be increased (more below).
4Q earnings will decelerate from the heaviest week of the quarter last week (with 37% of earnings weight (according to BoA)), but we still get our second-heaviest (by that metric w/18% of the SPX by earnings weight), including 131 SPX components reporting (according to Factset) and 19 >$100bn in market cap (down from 31 last week) in PLTR, TM, MRK, PEP, AMD, AMGN, PFE, DIS, QCOM, BSX, UBER, FI, LLY, PM, HON, BMY, and COP, in addition to a number of others not in the SPX like TM, UBS, SPOT, RACE, NVO, BABA, ARM, RHHBY, AZN, LIN, of which two are >$1tn (GOOG & AMZN).
Earnings spotlight: Tuesday, February 4 - Alphabet (GOOG) (GOOGL), Merck (MRK), PepsiCo (PEP), Advanced Micro Devices (AMD), and Amgen (AMGN).
Earnings spotlight: Wednesday, February 5 - Novo Nordisk (NVO), Walt Disney (DIS), Qualcomm (QCOM), Arm Holdings (ARM), and Uber Technologies (UBER).
Earnings spotlight: Thursday, February 6 - Eli Lilly (LLY), Linde (LIN), Honeywell International (HON), ConocoPhillips (COP), Neurocrine Biosciences (NBIX), and Bristol-Myers Squibb (BMY).
Earnings spotlight: February 7 - Fortive (FTV), Cboe Global Markets (CBOE), Banco Bradesco (BBD), and Kimco Realty (KIM).
Ex-US, the highlight is likely the policy decision from the Bank of England (25bp cut is exp’d) but we’ll also get decisions from India, Mexico, and others. In economic data, highlights are Canada payrolls, inflation data from the EU, Turkey, global PMI’s, Japan wage data, and industrial production from the EU’s top four economies. OPEC+ will also meet tomorrow (Monday) although no changes are expected.
In Asia, factory output data on Monday from a number of countries, including Australia, Japan, South Korea and Indonesia, will provide an insight into manufacturing activity at the start of the year. Also on Monday, Australia’s retail sales for December will show if the shopping spree seen in the second half of 2024 continued. Indonesia will release its consumer price data for January — the month it surprised investors with a rate cut. Thailand and the Philippines also report inflation this week. On Wednesday, Caixin PMI from China will show if activity stayed strong following a rapid expansion in December that was helped by Beijing’s stimulus blitz. Singapore and India report PMIs for January the same day.
In New Zealand, quarterly jobs and wages data will provide an indication of the health of the country’s labor market. The data will be a key input for the Reserve Bank of New Zealand’s February policy meeting, when it’s expected to continue cutting rates aggressively. Japan will release wage data for December on Wednesday, amid a focus on whether upcoming pay negotiations between companies and unions will lead to the kind of strong outcome that the Bank of Japan expects to see. Thursday will see trade data from Australia and Vietnam. The latter will also publish figures on consumer prices, retail sales and industrial production. On Friday, the Reserve Bank of India is expected to embark on an easing cycle with a cut in its repurchase rate to 6.25%.
The Bank of England is likely to deliver its third rate reduction of the current cycle, another cautious step toward easing constriction on the British economy. With services inflation at still more than twice its 2% target and pay growth buoyant, UK central bank officials are weighing the need to aid expansion against the danger of letting consumer-price pressures return. Investors will watch for signals on the pace of future moves, as well as for the vote tally, showing how strong a consensus officials have on the need for easing. In the euro zone, where the European Central Bank just cut borrowing costs for the fifth time, the first inflation reading of 2025 will be released on Monday. With January results for German and France stable, the overall number for the region is likely to stay unchanged, at 2.4%.
Also of note will be national manufacturing data. In Germany, factory orders on Thursday and industrial production on Friday will show if the multi-year downturn in Europe’s largest economy is bottoming out. Trade figures will reveal the extent of its surplus with the US — a sore point for Trump. French industrial numbers are scheduled for Wednesday, followed by Spain’s report on Friday. In the Nordics, Sweden’s Riksbank on Tuesday will release minutes of its Jan. 29 decision, when it cut borrowing costs and signaled a halt to easing for now. Consumer-price data will be published two days later, revealing if the inflation measure targeted by officials remains comfortably below 2% for an eighth month.
Looking south, data on Monday will probably show Turkish inflation slowed to 41% in January. The central bank is hoping that it weakens rapidly to hit 21% by year-end, enabling it to continue an easing cycle that started in December. Aside from the BOE, several other monetary decisions are due in the region:
The Bank of Mauritius on Tuesday will likely cut rates, as inflation is within its 2%-to-5% target range and is expected to remain benign because of lower global oil prices and a stronger rupee.
The Polish central bank will probably keep borrowing costs unchanged on Wednesday. Governor Adam Glapinski briefs reporters the following day.
Also on Wednesday, Icelandic policymakers are likely to cut rates. Local lenders Landsbankinn hf and Islandsbanki hf each predict a half-point reduction.
Kenya may also lower borrowing costs on Wednesday. Its real rate is one of the world’s highest, and inflation is forecast to stay below the 5% midpoint of the target range for the next couple of months.
Uganda will likely be less bold when it delivers its decision on Thursday, leaving the benchmark unchanged at 9.75% as price growth continues to inch up.
Also on Thursday, the Czech central bank is widely anticipated to reduce its rate by a quarter point.
Rate meetings are also scheduled in Armenia and Moldova.
In Latin America, Chile posts December GDP-proxy data, likely to confirm that the economy is losing momentum. Fourth-quarter growth may undershoot central bank forecasts even as sticky inflation readings have sidelined the central bank for now. Seventeen of 30 analysts surveyed by Citi expect Banxico to deliver a fifth straight quarter-point rate cut, while the other 13 see a 50 bps cut. With inflation back in the target range and the economy downshifting, policymakers have indicated they’ll consider larger rate cuts. Brazil’s central bank on Tuesday posts the minutes of its Jan. 28-29 meeting, the first overseen by new chief Gabriel Galipolo. Consumer prices likely sped up in Chile last month while edging lower in Colombia and slowing dramatically in Mexico. None of the economies is expected to have inflation back to target before the second quarter of 2026 at the earliest.
And here’s BoA’s cheat sheets.
And here’s calendars of 2025 major central bank meetings.
Market Drivers
So let’s go through the list of items that I think are most important to the direction of equity markets:
Fed/Bonds
As noted previously this was one of the sections that had grown unwieldy, so I’ve really pared it down. Given I provide daily updates on Fed expectations, Fedspeak, and analyst thoughts on the Fed, it’s duplicative (and time consuming) to gather it all again so, again, I encourage you to look at those (the daily posts) for updates. I will just give more of a quick summary.
I noted five weeks ago,
just a few cuts before a prolonged hold would be consistent with the 90’s “soft landing” experience, and it’s certainly not implausible that inflation gets “stuck” around current levels and growth and labor markets remain in good enough shape keeping the Fed to just one or two (or I guess no) cuts in 2025, but I think it’s also not unlikely that we see continued softening in labor markets and the economy, and with just 18% of investors expecting a recession in 2025, it feels like a growth scare and a quicker path of Fed rate cuts is underpriced.
And two weeks ago
the strong NFP print coupled with a jump in inflation expectations (and a drumbeat of hawkish Fed speakers during the week), markets moved to more fully price the “90’s ‘soft landing’ experience” seeing rate cut expectations dialed back to perhaps one cut (with pricing for none shooting higher as did pricing for a possible hike). I continue to think we’re pushing too far in the direction of no cuts, but until inflation shows some signs of resuming its descent or the labor market shows renewed signs of weakening (which at this point would take more than one month’s data) that’s where I think pricing will stick. So the inflation prints this week are important, but will be taken within that context.
And as noted last week, we did see softer inflation prints, which did see some unwinding of the move to no rate cuts and jump in bond yields, which continued last week, particularly after the risk off action in the markets Monday and then a more constructive than expected Jerome Powell who continued to describe current rates as “meaningfully restrictive” and sounded very constructive on inflation noting the past couple of reports had been better and that most of the remaining overshoot over 2% was due to shelter and “non-market based” prices, even as he reiterated the Fed was “in no hurry” to lower rates further. Fed rate cut bets ended the week with now two cuts almost fully priced, more consistent with my expectations, and yields softened until Friday when they jumped (on the long end) on the confirmation of weekend tariffs.
That may put a floor under yields for now, but overall my expectation was that they would be range bound this year until we got greater clarity on Trump policies and the first few months of inflation prints. Those will be key in determining whether we get another bought of residual seasonality which has seen 1Q inflation spike the past couple of years. If it doesn’t the y/y numbers will fall quickly. So, as I wrote the last few weeks, “For the time being, all we can do is wait and see where the data progresses given the extreme data dependency of the current Fed.”
The 2/10 curve little changed w/w at 0.34% down -7bps from the steepest since May ‘22 hit Jan 14th. It started the year at +0.33%, so it hasn’t done much.
As a reminder, historically when the 2/10 curve uninverts following a long period of inversion the economy is either in a recession or within a few months of one. It uninverted in Sept, so this looks officially like a "this time is different" situation.
The 3mos/10yr yield curve (considered a better recession signal than 2/10’s w/the last four recessions on average coming a few months after the curve uninverted (prior to that it generally uninverted after a recession had already started)) also little changed w/w at 0.27% down -15bps from the steepest since Oct ‘22 hit Jan 14th (but still up +1.72% since Sept 11th). It uninverted Dec 12th.
I have been a broken record that the 2yr #UST yield was too high trading above the current Fed Funds effective rate (meaning the 2yr was pricing a higher chance for net rate hikes than cuts over the next 2 years). Since then it has softened so that it’s now below, but at -15bps, not even a full cut, so I think there’s probably more to go unless we see inflation reaccelerate as it did in the past few 1Q’s.
Long term inflation expectations (as measured by the 5-yr, 5-yr forward rate (exp'd inflation starting in 5 yrs over the following 5 yrs), specifically mentioned by Powell at the Nov FOMC press conference (he said the metric was “right where it’s been, consistent with 2% PCE inflation”), fell back further this week, -4bps w/w to 2.30% but it had hit 2.26% on Thursday before rebounding Friday on the tariff announcement. It is just +1bps since the Nov FOMC.
10-yr breakevens were little changed w/w at 2.42% remaining near the highest since Oct ‘23.
With nominal 10yr Treasury yields falling more than inflation expectations last week, 10yr real rates, after hitting the highest since Oct ‘23 (and before that 2007) Jan 13th at +2.34%, fell back to +2.13%, still though well above the 2010-2020 peak of 1% (but down from the post-pandemic peak Oct ‘23 of 2.5%).
10yr real rates using 5-yr, 5-yr forward inflation expectations (subtracted from the 10yr nominal yield) similarly fell back from the highest since Oct ‘23 (and before that 2007)) on Jan 13th at 2.45%, to 2.26% as of Friday, still well above the 2013-2020 average of around 0.5% (but down slightly from the post-pandemic peak of 2.5% in October '23).
And as a reminder according to BoA the importance of real rates on equity returns has seen the largest increase in the factors they track over the past 5 yrs and explains a larger proportion of stock returns (83% correlation) in their data (to 2006), with the dollar close behind the most correlated (76%) since 2015.
Shorter-term real yields (Fed Funds - core PCE) now down to 1.68%, the least since Sep ‘23. While still the highest since 2007 before that, it’s down from 2.70% in June.
And the real prime rate (using core PCE) continues to edge lower from the 5.9% in June, which was the highest since Sep 2007. Now down -1% at 4.9%, the least since Aug ‘23, still though more than double the 10yr pre-pandemic avg.
And looking out longer term, one thing to note is the FOMC’s long run projection for the endpoint of the Fed Funds rate (the “neutral rate”) is now the highest since Sep 2018 at 3.0% (and not unlikely to go higher as I said earlier this yr). [This won’t get updated again until March].
The ACM model of the 10yr term premium (which is solely based on interest rates) continued to fall back from the +0.66% it hit Jan 13th (which was the highest on this model since May 2015), now at +0.47% as of Wednesday, still though the highest since 2015 prior to December. It’s still ~+62bps since the FOMC did the 50bps cut in Sept.
FWIW the the St. Louis Fed 10yr term premium estimate (which runs a week behind and is based off the Kim and Wright (2005) model (which differs from other models in that it incorporates non-yield curve factors such as inflation & GDP) shows an even higher term premium at +0.71% as of Jan 24th down from +0.80% Jan 10th which was the highest since Apr 2011. It is up +69bps since the Sept FOMC.
The extended discussion on term premium (what it is, why it’s important, etc.), can be found in this section in the Feb 4th Week Ahead.
As the MOVE index of expected 30-day bond volatility rebounded from a 1-mth low, still much closer to the lows of 2024 than the highs.
With bond volatility increasing (at least according to the MOVE index), 30yr mortgage spreads did as well moving further off the lowest since June ‘22 (2.27%) hit Dec 19th now at 2.39%, still though well off the 3.1% peak in June ‘23. But they are around +67 bps above the 2010-2020 avg level.
Lower spreads (compared to mid-2023) is what has kept 30yr mortgage rates from moving much over 7% like they did in Oct ‘23 (when they peaked at 7.8% according to Freddie Mac), so hopefully they don’t continue to move higher.
Chicago Fed National Financial Conditions Index and its adjusted counterpart (the latter attempts to remove the correlation between the various indicators due to broad changes in economic conditions), both of which are very comprehensive each w/105 indicators, in the week through Jan 24th saw the former fall to the least tight since Oct 2021 while the latter edged a tenth off the least tight since Nov 2021.
As the Fed continues to drain liquidity from the system via QT, I think it’s important to watch for stresses which give an early warning signal that they are perhaps going to far as they did in 2018 which led to a near bear market. One area I am monitoring is reverse repos (which is an overnight secured place institutions (mostly money markets and banks) can park excess funds to accrue some interest designed by the Fed originally to keep excess liquidity from pulling down rates too much in other short term markets). RRP grew rapidly in 2021 & 2022 as money was pumped into the system but since May ‘23 has been steadily drained down by the Fed’s QT program and higher bond issuance with banks discouraged by regulatory rules from taking up the increased Treasury supply.
In particular, the continued sizeable issuance of T-bills (<1 yr duration) of around $800bn/month (accentuated by the $60bn in balance sheet runoff (meaning the Fed has reduced its buying of maturing Treasuries by that amount which the private market has to fill)) drained ~$1.75 trillion from RRP in the year through March 1st. From then until early July RRP levels had remained relatively stable in the $375-$500bn range, but since early July they resumed their decline (in fits and starts), hitting new lows on Dec 20th at $98bn, the least since Apr ‘21 on the back of the Fed cutting RRP rates to the low end of the Fed Funds band which made parking funds there (versus lending overnight to other institutions or buying T-Bills) less attractive in line with their desire to sop up most of this “excess liquidity” (as they have described it).
RRP on Monday hit the lowest since Apr ‘21 at just $92bn but then built up as the week progressed to $188bn, the most since Jan 7th. The jump Friday is a bit unusual (we normally have only seen it at quarter-end), but I am going to guess has something to do with month-end.
So for now, I’m not changing my overall take which is that “I expect this to continue its decline given the Fed has made parking funds in RRP less favorable (or at least until the Treasury hits the debt limit and can no longer issue new bonds (just refinance maturing ones)). So for now, it seems there is a cushion to absorb issuance (in addition to the normal buyers).”
As noted previously, despite the drawdown in RRP Dallas Fed Pres Laurie Logan (who is an important voice given her extensive experience in the NY Fed's markets group) has said she believes current liquidity is “more than ample” (and the current NY Fed Pres Williams said something similar last year) and said she's looking for RRP to fall to "negligible" levels. As I said then “she's the expert so I'll defer to her, but I continue to be on the lookout for funding stresses now that RRP has crossed below $100bn, and I still think at zero RRP the Fed may need to stop QT to avoid another liquidity shortage as they did in late 2018.”
Also, we’ll have to see how the debt ceiling impacts things. With the Treasury likely to soon start drawing down its General Account (TGA) (Janet Yellen said last week that “extraordinary measures” would start in January), until the debt ceiling is raised the likely consequence is a build in RRP as money markets, etc., need another home for their short-term lending (the Treasury will only be able to roll over expiring debt, not issue new debt to keep up with spending). This was what BoA predicted back in Sept (more below). Their analysis has been pretty accurate (they saw RRP falling to $185bn by YE (about where it is now).
And I noted previously that BoA had pushed pushing back their est for the end of QT to Mar ‘25 (which the noted “could create a funding blind spot for the Fed” in the event the debt limit remains unresolved (you can follow this link and look in this section for more details on that). In summary their thinking was that, similar to 2023, the Treasury’s depletion of its General Account (TGA) when it cannot issue new debt (just refinance existing debt) will offset what would otherwise be a continued drawdown of liquidity. That will keep liquidity stable but will rapidly reverse once the debt limit is ultimately raised (which BoA est’s will again be in July as they assume Congress will take it to the very last second as is their habit), which could lead to a funding squeeze when auctions restart they will need to be resized to “catch up”. That didn’t really cause any issues when it happened May 2023 (the last late debt ceiling extension), but we also had a lot more liquidity in the system (RRP levels were at record highs above $2tn (arrow) but they fell sharply from there, down around -$1.7tn over the next 10 months). We have nothing like that amount of “free liquidity” this time around.
In January BoA pushed the end of QT out again to Sep ‘25 due to “(1) limited volatility in funding markets (2) minimal discussion around balance sheet policy in recent Fed communications, [and] (3) lack of concern around debt limit related dynamics.” Similar to the above discussion, they “think the timing of QT end largely depends on the timing of debt limit resolution and the speed / size of TGA rebuild… We see a summer deal ahead of the August X-date as our base case… Using debt limit assumption of an end-July DL resolution, we assume a QT end date in Sept 2025. It is possible QT ends in July prior to TGA rebuild… We expect the debt limit resolution to trigger a rapid rebuild of the TGA via bill issuance, which will quickly drain ON RRP and eventually reserve balances.”
In terms of their specific forecasts they think once the debt limit is raised we’ll see “$468b in bills issued and $470b in TGA rebuild liquidity drain, over 6x the pace of monthly QT in only 2 months. At this point funding pressure and volatility in funding rates will likely lead the Fed to end QT. The pace and magnitude of the TGA rebuild will be important for funding markets. A slow TGA rebuild & lower terminal TGA value will mean a more gradual liquidity drain and more limited funding pressures. A faster rebuild & higher TGA value will mean more acute funding pressure post debt limit resolution.”
They think that “most of the TGA rebuild will initially pull cash out of ON RRP [which they think will have rebuilt to $350bn] since TGA rebuild will likely see higher bill supply at cheaper front-end rates. Cheaper bill rates will draw MMFs cash out of RRP. Once the RRP reaches $0 the remaining drain will come out of reserves. Once QT ends for USTs, we expect the Fed to continue to roll off prepaid and maturing MBS but reinvest MBS into UST bills”.
BoA FWIW believes “the Fed should have ended QT by end ’24 to prevent an unintended over-draining of sysstem liquidity. We believe a Fed that continues QT into Q3 will see money market volatility + potential bank liquidity concern as TGA is rebuilt. The Fed’s justification for continued QT seems to be a belief that (1) banks demand fewer reserves than we expect ($3-3.25tn) (2) their liquidity adding repo tools are sufficient to keep money market pressures contained. We are skeptical on both. Longer QT risks over-draining & cheaper front-end USTs in Q3 ’25.”
So, in summary, until the debt ceiling is raised, BoA sees liquidity stresses being forestalled, but once it is they think we will quickly see RRP drain to zero necessitating an end to QT.
The reason monitoring RRP is important is that once it’s gone, it’s up to bank reserves to absorb any extra debt issuance, etc., that is not sold to foreign and domestic buyers. However, banks have been loathe to part with reserves beyond the $3tn level. For now, they remain comfortably above that (Jerome Powell noted this week that the Fed is watching for reserves to "approach levels that are somewhat above ample," meaning they see them as more than sufficient at current levels) at $3.20bn, down though -$159bn the past two weeks (from the most since Sept).
I’ve noted previously that it seems that as long as reserves remain above the $3tn level (which is where we saw indigestion in the credit markets in March ‘23 (which contributed to the banking issues (SVB, etc.)), it seems they indicate more than sufficient liquidity in the system.
Overall, bank reserves are just -$160bn below June 1, 2022 levels ($3.36tn), when the Fed started QT, a better result than even the most optimistic estimates at the time.
For background on various estimates of when reserves will be “too low” see the Feb 4th Week Ahead.
Getting back to rates, I said 10 months ago 2-year Treasuries were a good buy at 5%, and as I noted once the Fed started its cutting cycle the ship has likely sailed on seeing those yields anytime soon (meaning years). In terms of 10-yr’s I had advised then grabbing some at 4.7% which I had thought seemed like something we wouldn’t see anytime soon, but as I noted five weeks ago
the Fed saying the ‘recalibration phase has ended’ along with concerns about sticky inflation cropping back up and now questions about the inflationary impact of some of Donald Trump’s policies, has seen rates just about back there. I still am not sure we see 5% absent another ‘something new’ (like the Fed becoming even more aggressive (for example due to Dec’s data coming in hot (payrolls and CPI/PCE prices)).
And I noted two weeks ago
we once again did get “something new” in the strong payrolls print (which came along with an unexpected jump in consumer inflation expectations). That has pushed 10-yrs above the 4.7% level, perhaps now on their way to 5%. There are a lot of institutions that have said they’re buyers at that level, so we’ll see what happens if we get there. I certainly will be picking some up. That said, IF the Fed is truly done with the rate cutting cycle (which I don’t expect), then the 10yr yield should really be somewhere in the 5.3-5.5% range.
As noted earlier, though, with the cool inflation prints and more constructive than expected Jerome Powell, some of the steam was taken out of the bond rally, so for now we can just watch and wait. That said, I did trim this week a little of the 2 and 10yr exposure I picked up (around 10%).
In terms of much lower yields, as I said four months ago, we have probably seen the lows until we get a recession:
“while we didn’t quite see 3.5%, I think 3.6% is close enough, and I think we might have been at or near the lows at this point, particularly as the Fed has been raising their neutral rate estimate. If the endpoint for Fed Funds is around 3% (or higher) then it’s hard to see the 10yr trading much lower absent a recession. Similarly 2yrs at 3.6% seem to be very rich and almost certainly too low absent a recession consistent with my statement last week.” In short I’d expect to see 4% on these before we see 3.2%:
At around 3.6% on both the 2 & 10yrs absent a recession I think there’s not much value in either (I’d rather park my cash in short term Treasuries (0-3mths) or safe dividend paying stocks with a track record of growth (dividend aristocrats, etc.) at these levels.
For all the old “final hike” and “first cut” materials, you can reference the Feb 4th blog post.
BoA updated their FOMC Dove-Hawk Chart. Note it’s missing Hammack in ‘26 (Cleveland and Chicago vote every 2 yrs), but otherwise looks right. Also note that Philadelphia Fed Pres' Harker’s term is up next year (which is why they don’t have a name for Philadelphia), something I didn't realize.
I think this now needs some dramatic changes with Hammack (who dissented voting for no cut in Dec) clearly one of the most hawkish members, Daly at best a Centrist as she sees only 2 cuts in 2025, and perhaps Collins as well. Goolsbee is clearly the most dovish of the members currently.
And I came across one from BBG. I think it’s pretty accurate except Kashkari is definitely not that hawkish (he was calling for a December cut in early November):
And here who is rotating off and on for 2025.
Earnings
As a reminder, I have removed most of the background material, which you can get in the Feb 4th blog post. As you know I’ve moved on to 4Q and beyond. You can reference this post from 12/1/24 for stats on 3Q.
From Factset:
With 36% of SPX earnings in for Q4, Factset says 77% have beaten exp's, equal to the 5-yr avg of 77% but above the 10-yr avg of 75%, but those beats are just +5.0% above exp’s below the 5-yr avg of +8.5% and 10-yr avg of +6.7%. Still, earnings estimates jumped another five tenths w/w to +13.2% (up +1.5% the past three weeks), up from +11.8% at the end of the 4th quarter. This would be the most growth in three years and would mark the 6th consec quarter of earnings growth.
As we’re already starting to see, it’s normal for there to be a “beat” which sees actual earnings surpass estimates as of the end of the quarter (only 3 times in the past 40 quarters has that not happened (Q1 ‘20, Q3 ‘22, Q4 ‘22) according to Factset. The estimate at the start of the quarter was +11.9%. The 10-yr avg has seen a lift of +5.4%, 5-yr is better at +7.1%, but the past 1-yr has only been +2.2%. That would mean even at the low end earnings growth would end up over +14%, at the high end around +19% (!).
In terms of Q4 revenues, 63% of SPX reporters have beaten est's, below the 5-yr avg of 69% and 10yr avg of 64%, and they are just +0.9% above est’s (up +0.2% w/w) well below the 5-yr avg of +2.1% and 10yr avg of +1.4%). Still, Factset says SPX co’s are expected to see revenue growth of 5.0% y/y (+0.4% w/w), down slightly from +5.2% on Sept 30 but up from +4.6% at the end of the 4th quarter. It would mark the 17th consecutive quarter of revenue growth for the index.
In terms of profit margins, Factset says SPX co’s are expected to report net profit margin of 12.1% for Q4 (unch w/w), which is below the previous quarter’s net profit margin of 12.2%, but above the year-ago net profit margin of 11.3% and the 5-year average of 11.6%.
2025 quarter-by-quarter earnings decreased materially this week. Q1 ‘25 fell eight tenths to +10.1% (-4.0% last 13 wks), Q2 ‘25 down five tenths to at +10.9% (-2.2% last 13 wks), Q3 down four tenths to +14.9%, and Q4 down five tenths to +16.1%.
With Q4 earnings expectations increasing, FY ‘24 exp's according to Factset rose $1.17 to $239.37 (from the lowest since 2023), representing +9.4% growth. Looking further back, though, it remains down just around -2.5% from July 1, 2023, much better than the typical -6% or so drop we historically see.
2025 earnings expectations, confusingly with the quarter-by-quarter numbers deteriorating (maybe those referenced last week), increased for the first time this year +$0.96 from the least in 2 yrs to $273.63 (still though +14.3% growth (but down ~-2.5% since Sept 1st)).
FWIW 2026 earnings are exp’d to grow 13.7% (up 0.1% w/w).
In terms of the +14.8% earnings growth exp’d for 2025 Factset notes it will be a record at $275.19, although also notes that there is on average over the past 25 yrs a -6.3% deterioration from where it starts the year ($275.05) w/analysts overestimating in 17 of those yrs (which would equate to $257.72). But it should be noted that average includes 4 outlier years (2001, 2008, 2009 & 2020) where the overestimation was b/w 27-43% due to recessions. Excluding those, the difference is just -1.1% (which would equate to $272.02).
In terms of how markets are handled earnings beats & misses for 4Q, looking 2 days before to 2 days after an earnings release, Factset sees beats rewarded more than average at +1.5% vs 5yr avg of +1%, and misses punished slightly less than average(-2.2% vs 5yr avg of -2.3%).
Factset’s analysis of analyst bottom-up SPX price targets for the next 12 months as of Thursday was up +69pts w/w to 6,822 (+12.4%), now up ~1,787 points over the past 44 weeks.
Tech (+18.7%) replaces Materials as the sector with the largest upside seen by analysts, while Consumer Discr remains as the sector expected to see the smallest price increase (+2.7% up though from -3.3% six weeks ago (the first negative in over a year)).
As a reminder the last 20 yrs they have been on avg +6.3% too high, but note they underestimated it five of the past six years (including 2024).
In terms of analyst ratings, buy and hold ratings continue to dominate at 54.7% & 39.4% (from 54.7 & 39.6% respectively last wk (sell ratings up two tenths to 5.9%)). That 54.7% in buy ratings is down from 57.5% in Feb ‘22.
Energy (63%), Communication Services (63%), and Information Technology (62%) sectors have the highest percentages of Buy ratings, while Consumer Staples (40%) has the lowest percentage of Buy ratings. Industrials and Utilities have the most sell ratings (8%).
And some other earnings stuff:
Economy
Over the past 2+ years part of my earnings optimism has been due to the economy holding up better than expected. While earnings only track the economy loosely (and markets look forward 6-12 months), there is a clear positive correlation between the economy and earnings (particularly a weak economy and weak earnings), and there is a very strong correlation between earnings and stock prices (although stock prices (being as noted forward looking) generally fall in advance of a recession and bottom 6-9 months before the end of one). So if you can see a recession coming it is quite helpful, although very difficult (especially ahead of the market). You can reference this Week Ahead (see the Economy section) for a lot of material on how every recession is preceded by talk of a “soft landing” as close as a month before the start. That report also has the notes about how small caps have shorter debt maturity profiles and more of it (debt).
As I’ve been stating since I switched to the Week Ahead format in mid-2022, the indicators to me are consistent with solid (which at times has been robust) economic growth, and I have been a broken record that I “certainly do not think we’re on the verge of a recession (although as noted above every recession starts out looking like just some economic softening).”
This week again the data continued to show signs of stronger growth following the more mixed performance we’d seen in late November/December. While GDP at the headline level came in below expectations, it was mostly due to a drawdown in inventories as consumption (70% of the US economy) came in very strong, as did core business cap ex orders and shipments (core capital goods), and while income growth moderated it remained positive adjusted for inflation. Jobless claims remained low, as did consumer prices which reduces the inflation “tax”. New home sales also beat expectations. Exports were a little weak due to the strong dollar, but overall it was a solid week of data.
So for now I don’t see any changes to my overall takeaway on the economy from 17 weeks ago that “the situation continues to seem like manufacturing is subdued but trying to bottom, housing perhaps has inflected off the bottom [although should remain constrained for now by the resurgence in mortgage rates], labor markets (and the services sector and construction in particular) are solid with very healthy wage growth, and productivity appears to be robust (this can make a big difference in allowing the economy to expand without triggering inflation)…I continue to feel that any softening does not appear to be morphing into a recession.”
And as I said 22 weeks ago:
without question, the evidence is building that the days of >3% real GDP growth are behind us (although we got there in Q3), and we should be happy to settle into something more around trend (1-3% real (infl adjusted) growth). That though is far from a disaster. The important thing will be to see the softening level out (L-shape) rather than continue to fall turning the “soft landing” into a recession.
So far that’s what we’ve seen.
The Citi Economic Surprise Index improved slightly w/w to 12.4, although remains down from 22.5 two weeks ago, the best in a month, still though up +14.1 pts this year after falling to the least since Sept and into negative territory on Dec 31st.
It’s down -30.9pts from 43.3 eight weeks ago, but still closer to the highs of 2024 (47.2 in Feb) than the lows (-47.5 in July).
And GDP estimates are for now consistent with a no recession call (again though remembering GDP going into recessions generally doesn’t look like one is coming (it was up around 2% in Q2 & Q3 2008 well after the recession had started)). After Q3 was revised up to 3.1%, Q4 decelerated but still above trend at 2.3%, and the trackers that have initiated Q1 tracking are looking for a slightly higher read in Q1 (although it’s very early).
Goldman initiates 1Q GDP tracking at 2.6%, three tenths below Atlanta Fed (who has been dead on the 1st estimate the last two quarters). FWIW Goldman has been two tenths above the 1st estimate the last two quarters.
Atlanta Fed (who was right in line in its 3Q & 4Q est’s of #GDP (and just a tenth off for 2Q from the 1st est)), initiates its 1Q ‘25 GDP est at 2.9%. They don't yet have the component breakdown up though.
BoA (who as a reminder est’d 3.0% for 3Q vs 2.8% actual), raises their 4Q GDP tracking this week (through Thurs) three tenths to 2.3% on stronger than exp’d housing starts and industrial production, now up a half percent from two weeks ago when were the lowest since they started tracking in November.
NY Fed’s 1Q #GDP Nowcast (as a reminder, they had 2.56% for 4Q vs 2.3% 1st est (they were off a similar amount for 3Q)) fell eight hundredths to 2.92% as the weaker than exp’d 4Q GDP print and durable goods new orders more than offset the better than exp’d consumption data. It is still up notably up from 2.11% four weeks ago. As a reminder, the NY Fed’s model is dynamic and so adjusts in real time as data evolves, and “parameter revisions” subtracted -0.01%.
And the St. Louis Fed GDP tracker, which has mostly undershot actual real GDP since Q2 ‘22, but which was right on in Q1 & Q4 2024, hasn’t updated its Q1 ‘25 yet.
The Weekly Econ Index from the @DallasFed (scaled as y/y rise for GDP), which runs a week behind other GDP trackers, in the week through Jan 25th remained little changed at 2.82% from 2.79% in the prior week (rev’d from 2.84%) keeping it above its 2024 range (1.49 - 2.66%) that it left only twice during the year.
The 13-wk avg continued its steady improvement now up to 2.34%, the best since 2022, evidencing overall economic momentum that is accelerating above trend.
https://www.dallasfed.org/research/wei
Other economy stuff:
Valuations
Like the other sections, I’ll just post current week items regarding the multiple. For the historical stuff, see the Feb 4th blog post.
With equities up but 2025 earnings expectations higher as well, forward P/E’s were mixed but overall little changed:
-The SPX forward P/E at 21.8 (now just -0.5pts from the highest since mid-'21).
-Mid-caps (S&P 400) at 16.2 (down -0.9pts from the highest since early-’21 (17.1)).
-Small caps (S&P 600) at 15.9 (down -1.2pts from the highest since early-’21 (17.1)).
-Yardeni's “Megacap-8” (adds NFLX) P/E down to 29.4, +3.0pts from the 26.4 it hit 17 weeks ago (which was the least of 2024) still a little closer to the 31.5 it hit 25 wks ago (which was the highest since Jan ‘22)).
Breadth which got back on track the prior week rebounding from multi-month lows on longer-term metrics mostly deteriorated this past week.
The McClellan Summation Index ("what the avg stock is doing") was the one breadth component that continued to improve this week hitting a 6-wk high (after hitting the least since Nov ‘23 four weeks ago).
% of stocks over 200-DMAs edged to a 3-wk low.
% of stocks above 50-DMAs, like those over 200-DMAs, around the least in 3 weeks. Well off from where we were entering December.
% of stocks above 20-DMAs at 2-wk lows.
Value/Growth hit a 6-wk high Monday but fell back towards the least since Jan ‘22 the rest of the week, although still off the lows of the year.
The equal-weighted SPX vs cap weighted ratio like value/growth hit a 6-wk high on Monday before falling back towards the all-time lows hit in July but remaining off the lows of the year.
Unlike value/growth or the equal-weight/cap weight ratios, IWM:SPY (small caps to large caps), didn’t spike on Monday and remains not far from the least since July (which was the least since 2000).
Equity sector breadth based on CME Cash Indices deteriorated with just 5 of 11 sectors green, down from 9 the prior week, (although up from 3 and 2 the prev two weeks), and four sectors down more than -0.7% (none the prior week). Still all but one of the green sectors was up over 1% and two up over 2%. But four sectors also down over -1% with two down over -4% (energy and tech).
Over the past month, just tech was lower. Every other sector up at least 2% according to CME Cash Indices.
SPX sector flag from Finviz consistent w/very mixed performance. Huge losses in NVDA (-16%(!)), MSFT, ORCL, AVGO, AMD, ANET, NOW, CMCSA, ETN, CAT, LMT. Every SPX energy component lower but one (BKR).
Other breadth stuff:
Flows/Positioning
Overall global flows from BoA (EPFR data): : $24.0bn to equities, $17.6bn to bonds, $0.5bn to gold, $0.2bn to crypto, $12.6bn from cash.
Here were some more details. It was the first January outflow for EM shares since 2016, while cash, Treasuries, US (and large cap) stocks all saw record Jan inflows (global stocks most since 2018).
Bank loans again topped the FICC table of flows by % of AUM by a wide margin (3rd wk in a row, and 17th consec inflow).
ICI data on money market flows saw a -$30.3bn outflow in the week through Jan 29th, larger than the -$12.6bn EPFR saw. Also while EPFR saw a record +$174bn in total Jan inflows, ICI saw a much smaller +$22.5bn.
ICI data saw ~+$962bn in 2024 and +$1.15tn in 2023. Total MMF assets are at $6.87tn just off the record high. Most of the drop was institutional (-$24bn) with retail seeing a smaller drop (-$6bn). In terms of totals, 60% is institutional, 40% retail.
Looking at CTA (trend follower) US equity positioning, BoA says according to their models following Monday’s rout in tech stocks that “the NASDAQ-100 was hit with a 3% decline that could have seen actual trend followers trim (but not stop out of) long positions. Our model’s S&P 500 long saw a smaller drop, and both S&P 500 and NASDAQ-100 long positions are off peak levels but could see buying in the coming weeks.”
So, after modest buying last in SPX & NDX positions, it looks like they took that back off on the later with scope for more selling. There’s some modest scope for buying, mostly on the SPX & RUT (the latter has flat positioning so a lot of room for CTAs to build positions).
Price trend strength remains strongest still though for the $NDX (42% down from 61% three weeks ago), versus the $SPX (37% down from 43% three weeks ago) and $RUT (now -2% up from -19% two weeks ago). #Japan’s #Nikkei225 improved to 31% while the Euro #Stoxx50 as noted previously is at 81% where BoA sees CTAs likely to be continue adding to equity longs, “but positioning is also nearing its peak levels.”.
In terms of gamma positioning, BoA says “Monday, concurrent with the S&Ps ~1.5% decline, SPX gamma fell aggressively from +$12bn on last Friday down to +$5.9bn by the end of Monday’s session - roughly where gamma remained the rest of the week. As of Thursday’s close, SPX gamma was long $5.8bn (47th 1y %ile). Unusually, the current SPX profile is downward sloping suggesting gamma may decline if equities rally from here (the reverse is more common).”
As BoA notes according to their models, we’re in an odd situation where positive moves in markets will lower gamma (and increase volatility, which though in that case would be to the upside.) while negative moves will increase gamma (to around the 6000 level) leading to less volatility. Gamma falls sharply though on a move under 5900.
So the gamma situation is favorable as upside is enhanced while downside is cushioned. Overall, though gamma is not particularly high so that downside cushion is not like what we saw for much of 2024.
BoA est's that with equity and commodity volatility increasing last week, risk parity strategies made minor changes in those positions while adding a bit to bonds which had mostly seen sales over the past couple of months. Bonds continue to be heavily overweighted overall, but that overweight has been cut in half from where it peaked last year. #oott
BoA est’s that volatility targeters (vol control), after having been big sellers five weeks ago, which took back most of the increase in positioning since October, sold back the very modest buying of the prior week. With equities remaining quite volatile last week, I doubt we’ll see them rebuild much, and we may see further selling.
And BoA notes the amount of both S&P 500 and NASDAQ-100 futures that leveraged & inverse ETFs would theoretically need to trade for each 1% move decreased with spot although remains well off the lows of several weeks ago.
And after buybacks ended 2024 at a record, BoA sees some evidence of them slowing from last year’s pace but remain “slightly above typical seasonal levels”.
And some other notes on positioning:
Sentiment
Sentiment (which I treat separately from positioning) is one of those things that is generally helpful when its above average (“it takes bulls to have a bull market”, etc.) and when it’s at extreme lows. In between it doesn’t really tell you much. Five weeks ago I had noted sentiment started to deteriorate which it did through last week when sentiment ticked higher. Sentiment measures were mixed this week with some improving and some deteriorating, but most all remaining in the “Neutral” area, so not particularly helpful.
The 10-DMA of the equity put/call ratio (black/red line) plummeted last week to the lowest since July (which was the least since Apr ‘22) indicating investors were scrambling for upside vs downside protection.
When it’s increasing it normally equates to a consolidation in equities and increase in volatility and vice versa.
CNN Fear & Greed Index up +3pts w/w to 46 (it hit 49 Thurs, the highest since Dec 17th), moving just out of “Fear” to “Neutral”. It was at 64 (“Greed”) a year ago.
Looking at the components:
Extreme Greed = None
Greed = junk bond demand; safe haven demand (20-day difference in stock/bond returns); 5-day put/call options
Extreme Fear = stock price strength (net new 52-week highs)
https://www.cnn.com/markets/fear-and-greed
BofA’s Bull & Bear Indicator (a global metric), rose for a 4th wk (after falling for 12 straight), +0.2pts, now 4.2 ("Neutral"), still up just 1pt from 3.2 four weeks ago which was nearly a 1-yr low, on “on inflows to high-beta Emerging Markets & High Yield bonds, tight credit spreads, and bullish hedge fund positioning in oil futures.”
Helene Meisler's followers remained bearish for a second week (and third in four), after breaking a 9-wk streak of bullishness (the longest stretch since 2021), the first 2-wk bearish streak since November and the most bearish since last March with this week just 38.9% voting next 100pts up, down from 48.2% the previous week.
As a reminder this group is generally not a contrarian indicator.
As a reminder, “[h]istorically...euphoria levels generate a better than 80% of stock probabilities being lower one year later.” In that regard, it first entered euphoria in late March (when the SPX was around 5200) and then reentered in late October (around 5800).
Seasonality
As we move into February, we enter one of the weakest, if not the weakest, months for seasonality in the 4-yr presidential cycle (Feb of Yr 1). But we did have an up January at least, which bodes well for the full year. On average though February is only up 46% of the time historically with a -2.1% average loss for the month in Pres yr 1 (and it’s not much better for an average February. Note much of the weakness though is backloaded.
Of course, as always remember that seasonality is like climate. It gives you an idea of what generally happens, but it is not something to base your decision on whether to bring an umbrella (as the Santa Rally showed us).
And as we consider seasonality, a really nice post from Callie Cox about how you need to take historical analogies w/a grain of salt (unless you've dug into the history). Her chart on Presidential election yr performance w/ & w/o 2008 (when the SPX was -17% in Oct) is a wonderful example.
For references to all of the “up YTD through Feb” see the March 3rd post. For all the very positive stats through March (strong 1Q, strong two consec quarters, etc.) see the April 14h post.
As we turn the page into the new year, we’re presented with a very different backdrop than what we saw for much of 2024 when the Fed was moving from hiking to cutting, bond yields were falling, seasonality was mostly favorable, systematic positioning was mostly a tailwind, political risk was low, valuations had room to grow, liquidity was very robust, the economy was firing on all cylinders, volatility (until early August) was more subdued, earnings were rebounding, etc… but since the very strong September employment report (followed by sticky inflation reads) the road has been much tougher. In fact since the Sept employment report (Oct 4th) the SPX is up 5% (not terrible of course).
Now we’re in what is historically a more challenging year (1st year of a Presidential term and 3rd year of a bull market following two 20% years) with valuations well above where we started 2024, high expectations (judging from analyst SPX forecasts), higher volatility and political risk, fewer current tailwinds from systematic positioning, weak breadth (although that wasn’t much of a problem in 2024), much higher bond yields (particularly real yields), a Fed talking more about fewer than more cuts and continuing to drain liquidity that is now hitting levels we’ve run into issues in the past, high earnings expectations, etc.
It doesn’t mean that we can’t have a good or even a great year. Balance sheets remain very solid as does the economy and labor markets (even if slowing), earnings are expected to be very good, buybacks are expected to be a continued tailwind, there’s a lot of scope for the Fed to become less hawkish, the upcoming administration may provide big tailwinds in tax cuts, deregulation, etc., etc. But we need to see all of those come through, and disappointments are not going to be welcomed given the set-up, so my expectation is for choppier markets more like we’ve seen since October than what we saw before.
And that’s mostly what we’ve seen since then (some upside but it’s been very choppy with a lot more volatility and headline risk). I noted January was “chock full of catalysts,” headlined by earnings (which we seem to be navigating pretty well) and what comes out of the incoming Trump administration (which we’re in the teeth of this week). But as I also noted, economic data has mostly been better than expected, valuations have come down a (little) bit, and breadth has improved (also a little). Buybacks will start to resume, systematic positioning is low giving a lot of room for buying at some point, and the Fed (or at least Jerome Powell) was more constructive than expected on Wednesday. The big wildcard remains what comes out of Washington, but if perhaps we can get some unexpected surprises for the better at some point, it will go a long way to allowing the other tailwinds to continue to push us higher.
But as always just remember pullbacks/corrections are just part of the plan.
Portfolio Notes
A lot of trades over the past two weeks with all the volatility. It might take me a couple of weeks to get them all reflected here as I bought and sold a lot of calls so have to pick through to find the individual stock trades.
Had all of KMI called away. Sold out of NKE, ON, trimmed TCEHY, VNQI, JD, RBGLY, CHWY, SHY, KIM, VICI, CEG, ING.
Bought PLTM, EA (new), XOM, LVMUY, CAG, BUD, O, VALE, CMCSA
Cash = 32% (held mostly in SGOV, MINT & BOXX (BOXX mimics SGOV but no dividend, all capital appreciation so get long term capital gains if you hold for a year) but also some non-TBill (>1yr duration) Treasury ETF’s (if you exclude those longer duration TBill ETF’s, cash is around 11%)).
Positions (after around the top 20 I don’t keep track of their order on a frequent basis as they’re all less than 0.5% of my portfolio).
Higher risk due to business or sector issues; own due to depressed valuation or long term growth potential (secular tailwinds), but at this point I am looking to scale out of these names on strength. These are generally smaller positions.
Note: CQP, EPD, ET, MPLX, PAA, WES all issue K-1s (PAGP is the same as PAA but with a 1099).
Reminder: I am generally a long term investor (12+ month horizon) but about 20% of my portfolio is more short term oriented (just looking for a retracement of a big move for example). This is probably a little more given the current environment. I do like to get paid while I wait though so I am a sucker for a good well supported dividend. I also supplement that with selling calls and puts. When I sell a stock, I almost always use a 1-2% trailstop. If you don’t know what that is, you can look it up on investopedia. But that allows me to continue to participate in a move if it just keeps going. Sometimes those don’t sell for days. When I sell calls or puts I go out 30-60 days and look to buy back at half price. Rather than monitor them I just put in a GTC order at the half price mark.
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