While leading indicators seem to be suggesting both that the U.S. economy is headed for a downturn and that price pressures are cooling, the Federal Reserve seems determined to wait until prices fall further and the typically lagging U.S. jobs market cools off before relenting from its rate-hike campaign.
So keep that in mind as the nonfarm payrolls report gets released at 8:30 a.m. Eastern.
Onto our call of the day, which is from Citi, which has been one of the more hawkish of the Wall Street banks in terms of its Fed expectations. Its global strategy team looked around the world and decided to cut its recommendation on the U.S. to underweight from overweight.
“Recession reality approaches as Fed hawkishness manifests in signs of slowing activity. We expect a weaker first half, and a stronger second half,” says the Citi team. It has a midyear target on the S&P 500
of 3,700, but 4,000 for the year end. “We assume recession concerns and Fed hawkishness will peak during the first half of 2023, with markets anticipating recovery in the second half of 2023.”
Not that profitability will be so bad — it’s expecting just a 3% drop in earnings per share for the year, though that’s ahead of consensus expectation. And it’s expecting a leadership transition away from the past decade’s mega-cap growth names.
What Citi is now more optimistic about is Continental Europe, which it lifted to overweight from neutral. “Cheap valuations already discount much bad news. Economies should stabilize and rates peak later in the year,” says the Citi team, which already was overweight on U.K. equities.
Citi is neutral toward emerging markets (though overweight China and Brazil), and underweight Japan, which it says is vulnerable to an appreciation in the yen
More broadly, says the Citi team, buy the dips but don’t chase the rallies.
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Economists polled by The Wall Street Journal expect the Labor Department to report nonfarm payrolls growth slowed to 200,000 from 263,000 but for the unemployment rate to stay at 3.7%. The range of sell-side forecasts goes from 130,000 to 350,000. Average hourly earnings are forecast to ease to 0.4%.
There’s also a host of Fed speakers, including Gov. Lisa Cook, who may offer their thoughts on the jobs report. Overseas, Eurostat reported that prices slowed to 9.2% year-over-year in December from 10.1% in November, the slowest rate since August.
may face further pressure after cutting prices in China for the second time in three months.
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shares rose on a Wall Street Journal report that former CEO Vince McMahon is planning a return and will pursue a sale of the business.
The House of Representatives may try again to install a speaker after Rep. Kevin McCarthy’s bid was rejected for the 11th time.
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