Stocks meander into Christmas after cool PCE - Newsquawk US Market Wrap

• SNAPSHOT: Equities up, Treasuries steepen, Crude down, Dollar flat.
• REAR VIEW: Cool PCE; Strong durable goods; UoM revised up; Atlanta Fed revised down; Strong UK retail sales; GDP disappoints; China increases regulation on gaming names; BMY to buy KRTX; SNPS looking at acquiring ANSS; NKE missed on revenue and cuts guidance.
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MARKET WRAP

Stocks saw marginal gains on the last trading day before Christmas with the RUT the notable outperformer. Gains in equities were broad-based with predominantly all sectors closing green, aside from Consumer Discretionary which was lower after Nike (NKE) sunk following weak guidance, weighing on peers. Aside from Nike earnings, US data took the limelight with PCE cooler than expected, Durable Goods stronger than expected while New Home Sales disappointed and the UoM saw revisions higher in the final December release. The Dollar was ultimately flat with little of note happening after the quiet data aside from a revision lower to the Atlanta Fed GDP. Oil did see some upside on WSJ reports that Iran forces are providing Houthi's with real time intelligence to target vessels in the Red Sea, albeit futures still settled in negative territory. The Treasury curve steepened in choppy trade in response to the mixed data albeit price action was exaggerated in thin liquidity ahead of the holidays. Elsewhere of note, China stocks, namely Tencent and NetEase, took a hit after the Chinese regulator issued draft rules for online game management.

US

PCE: The Fed's preferred gauge of inflation, was cooler than expected in November. The headline declined 0.1%, despite expectations for an unchanged print again. The price decline was led by a 0.7% fall in goods, while prices for services rose 0.2%. The Y/Y rose by 2.6%, beneath the 2.8% forecast, easing from the 3.0% rise in October, prices for services rose 4.1% while goods prices declined 0.3%. The core metrics were also cooler than expected, M/M rose 0.1% (exp. 0.2%, prev. 0.1%), while the Y/Y rose 3.2% (exp. 3.3%, prev. 3.4%). Personal Income rose 0.4%, in line with expectations and accelerating from the prior (0.2%). Spending, meanwhile, rose 0.2%, matching the prior pace but beneath the 0.3% expectation. This data will unlikely sway the Fed's thought process in the immediacy but it shows that price pressures are continuing to cool and the market is still pricing in the first 25bp rate cut in March. Since Powell's dovish press conference, Fed speak has been attempting to dial back those expectations. although if data keeps coming in on the dovish side, the Fed may struggle to push back on the market's view. Note, the PCE prices ex food, energy and housing was flat vs the prior months 0.1% rise, while the core service prices ex housing matched the prior month pace at 0.1%.

DURABLE GOODS: Durable Goods rose 5.4% in November, above the 2.2% forecast and paring the prior 5.1% decline. Ex-transport was also strong, rising 0.5%, above the 0.1% forecast and climbing from the prior 0.3% decline. The super core durable goods (non-defence capital goods excluding air) also beat expectations at 0.8% (exp. 0.2%), although the prior was revised down to -0.6% from -0.3%. Overall, it was a strong report and Pantheon Macroeconomics pointed out the strength was supported by the UAW workers going back to work and a large Boeing (BA) order from Emirates. In terms of the impact to GDP, Pantheon reminds us that the only input from Durable Goods into the national accounts is nondefense capital goods shipments ex aircraft, and drives the equipment investment component of GDP, which declined by 0.1% matching the prior two month readings. The Atlanta Fed GDPNow data was released after the data, which incorporates the Durable Goods, PCE and New Home Sales data, and was revised down to 2.3% from 2.7% on December 20th.

UOM SURVEY (Final): The final UoM headline reading for December was revised up to 69.7, above the prior, and expected, 69.4, hitting its highest reading in five months. Current conditions fell to 73.3 from the initial 74.0, while forward-looking Expectations rose to 67.4 (prev. 66.4). On the inflation footing, 1yr ahead remained unchanged at 3.1% with the longer-term 5yr revised marginally higher to 2.9% from 2.8%, remaining elevated to the 2.2-2.6% range seen in the two years pre-pandemic, but is still lower than November's 3.2% which will could help give support to the argument for earlier rate cuts. Overall, Oxford Economics adds, falling gasoline prices, rising equity prices, and declining realised inflation came together to lift the headline but the implications for near-term consumer spending are modest, at best.

NEW HOME SALES: New Home Sales in November slumped 12.2% to 590k, well below the forecasted 685k and the prior 672k, printing a new YTD low. Looking at the details, new home supply rose to 9.2 months' worth at current pace (prev. Oct 7.9 months), with median sale price USD 434.7k (-6.0% Y/Y). The headline largely reflects the lagged effect of the spike in rates earlier this year, as mortgage rates are now falling sharply as Pantheon Macroeconomics points out the rate on a 30-year conventional is down nearly 110bp from the recent peak, in late October. As such, the consultancy adds, it will eventually feed through to higher new home sales, which also continue to benefit from a low, albeit steadily rising, level of existing home supply. On prices, PM quips, new home prices appear to have drifted lower over the past couple of months, but it remains too early to say that a new downtrend has begun.

FIXED INCOME

T-NOTE (H4) FUTURES SETTLED 2+ TICKS LOWER AT 112-19

Treasuries were choppy after a slew of mixed data exaggerated price action in thin liquidity conditions. At settlement, 2s -2.0bps at 4.329%, 3s -1.5bps at 4.045%, 5s -0.3bps at 3.879%, 7s +0.3bps at 3.916%, 10s +0.7bps at 3.901%, 20s +1.2bps at 4.217%, 30s +1.9bps at 4.054%

INFLATION BREAKEVENS: 5yr BEI -1.3bps at 2.188%, 10yr BEI -0.3bps at 2.199%, 30yr BEI -0.6bps at 2.194%.

THE DAY: Treasuries entered the Friday NY session on the front foot and were being led by the belly ahead of the US data in very light volumes. T-Notes initially hit a low of 112-18 in the APAC session, with JGB yields climbing higher with the BoJ minutes showing some members looking for an exit from current policy, in addition to a poor demand reception at a long bond auction. Better buying surfaced in Europe, with support from Gilts amid the downward revisions to UK GDP, although there were strong retail sales figures also to contend with. Nonetheless, T-Notes went on to print peaks of 112-31 at the NY handover, respecting the peaks of 113-04+ from Thursday.

In reaction to the soft November PCE figures (both headline and core), soft personal consumption, in line personal income, but massive surge in November Durable Goods orders, T-Notes (H4) fell from 112-29+ to 112-21+ within a few minutes, only to pare fairly quickly. But there was another push lower later in the NY morning, aided by the revisions higher in both the Uni of Michigan sentiment index and the longer-term consumer inflation expectations, with profit taking in thin trade making a mark.

AHEAD: For next week, with Christmas on Monday, we get 2s, 5s, and 7s auctions on Tues, Weds, and Thurs, respectively. There are no major US data releases next week, barring some regional surveys.

NEXT WEEK'S AUCTIONS: Plenty of supply: US to sell USD 57bln of 2yr notes on Dec 26th, USD 58bln of 5yr notes on Dec 27th, and USD 40bln of 7yr notes on Dec 28th; all to settle on Jan 2nd. US to sell USD 26bln of 2yr FRNs (reopening) on Dec 27th; to settle on Dec 29th. US leaves 42-day, 13-, 26-, and 52-week bill auction sizes unchanged at USD 70bln, 75bln, 68bln, and 44bln, respectively; all to be sold on Dec 26th and settle on Dec 28th.

STIRS:

• SR3Z3 +0.3bps at 94.635, H4 +2.5bps at 95.020, M4 +4.0bps at 95.515, U4 +4.0bps at 95.920, Z4 +2.5bps at 96.260, H5 +1.0bps at 96.540, M5 +0.5bps at 96.735, U5 +0.0bps at 96.830, Z5 -0.5bps at 96.855, Z6 -0.5bps at 96.790, Z7 -1.5bps at 96.680.
• SOFR at 5.31% (prev. 5.31%), volumes at USD 1.72tln (prev. 1.678tln).
• NY Fed RRP op demand at USD 0.772tln (prev. 0.778tln) across 85 counterparties (prev. 85).
• EFFR at 5.33% (prev. 5.33%), volumes at USD 101bln (prev. 97bln).

CRUDE

WTI (G4) SETTLED USD 0.33 LOWER AT 73.56/BBL; BRENT (G4) SETTLED 0.32 LOWER AT 79.07/BBL

The crude complex ended the last trading session of the year flat, in a day with little to no crude specific newsflow as participants shut up shop for the holiday period. Nonetheless, all eyes on Friday were on the US PCE report, which was cooler than expected, and after that trade seemingly fizzled out for the day. WTI and Brent hit session highs of USD 74.98/bbl and 80.37/bbl, respectively, after WSJ sources noted Iranian paramilitary forces are reportedly providing the Houthi's with real-time intelligence which is being used to target vessels transiting the Red Sea. However, the crude complex swiftly pared the upside and grinded to session lows of 73.39/bbl and 78.88/bbl in wake of the last US data release of the year (UoM Final (Dec) New Home Sales (Nov)). In terms of risk events, all eyes will remain focused on the Red Sea tensions and any further escalations on the near future. Note, Baker Hughes was released on Thursday this week.

EQUITIES

CLOSES: SPX +0.17% at 4,755, NDX +0.12% at 16,777, DJI -0.05% at 37,386, RUT +0.84% at 2,034.

SECTORS: Consumer Staples +0.69%, Materials +0.63%, Health +0.49%, Industrials +0.44%, Utilities +0.34%, Real Estate +0.32%, Energy +0.25%, Financials +0.23%, Communication Services +0.17%, Technology +0.04%, Consumer Discretionary -0.65%.

EUROPEAN CLOSES: DAX -0.07% at 16,733.05, FTSE 100 +1.02% at 7,715.68, CAC 40 +0.12% at 7,583.43, Euro Stoxx 50 -0.03% at 4,534.15, IBEX 35 -0.06% at 10,101.00, FTSE MIB -0.01% at 30,361.21, SMI: -0.01% at 11,144.88

STOCK SPECIFICS:

• Nike (NKE) -12%: Missed on revenue, guided Q3 revenue slightly negative Y/Y and cut FY24 revenue growth estimate. Added it sees 400bps headwinds from supply chain disruptions.
• Karuna Therapeutics (KRTX) +47%: Bristol Myers (BMY) reached a deal to buy Karuna Therapeutics for USD 14bln, or 330/shr. Note, KRTX closed Thursday at USD 215.19/shr.
• Synopsys (SNPS) -6% ANSYS (ANSS) +19%: Synopsys is reportedly in talks to acquire Ansys, according to Reuters sources. WSJ citing sources added a deal could be struck early in 2024, and the talks could still fall apart, and another suitor could emerge. Followed Bloomberg sources this morning that ANSS was exploring a sale amid takeover interest.
• Rocket Lab (RKLB) +16%: Won a US Government contract worth USD 515mln.
• Of note for gaming names, NetEase (NTES) -16% Bilibili (BILI) -5% Unity (U) -1.5%: China issues stricter online game regulations.
• Cummins (CMI) -3%: To take USD 2bln hit in Q4 from emission claims settlement.
• Occidental Petroleum (OXY) +0.5%: Berkshire Hathaway (BRK.B) bought a further 5.2mln shares as part of option exercise on December 19th, for a total of USD 312.1mln.
• Analog Devices (ADI) +0.3%: Upgraded at Edward Jones. Elsewhere, UBS named Analog one of its semi stocks to like heading into 2024.

US FX WRAP

It was very quiet holiday trade on Friday with the DXY flat despite several data releases. The US PCE was cooler than expected while Durable Goods was hot and New Home Sales missed. The Atlanta Fed GDPNow tracker for Q4 was revised down too, while the UoM survey was strong and inflation expectations were revised slightly up in the longer-term forecasts.

The Euro was flat trading on either side of 1.10 with the highlight being ECB's Schnabel stating she expects inflation to rise again slightly in the short term, stressing the ECB still has a way to go. The Yen was the G10 underperformer with USD/JPY rising back above 142.00, currently around 142.50. There was little reaction to the Japanese CPI overnight, which was broadly in line with expectations. The Antipodes were marginally softer vs the Dollar with some weakness seen as US stocks sold off in the afternoon; similar was seen with GBP and CAD. For GBP, Retail sales were strong but GDP disappointed. CNH was softer against the Greenback with notable equity downside seen in China overnight after China stepped up regulation on the video game sector, weighing on Tencent (700 HK) and NetEase (9999 HK). SEK and NOK saw decent gains, but the SEK was the G10 outperformer.

EMFX was mixed, CLP lagged on falling copper prices while COP outperformed, with BRL and MXN seeing modest gains vs the Dollar. ZAR saw notable weakness while the TRY was also softer vs the greenback.