North American Morning Briefing: Fears of Harder Economic Downturn Continue to Dominate

MARKET WRAPS

Watch For:

Weekly Jobless Claims; earnings from Broadcom, Chewy, Costco, DocuSign, Lululemon Athletica

Opening Call:

Today's Headlines/Must Reads

- China Economy Back in Force From Mid-2023, Morgan Stanley Predicts

- SEC Faces Calls to Boost Crypto-Exchange Action

- The $42 Billion Question: Why Aren't Americans Ditching Big Banks?

- Car Dealers Prepare for Softening Demand as Uncertain Outlook Looms

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Stock futures edged into positive territory on Thursday, perhaps setting the stage for an end to a losing run.

This week has seen caution emerge from the banking sector. JPMorgan Chase CEO Jamie Dimon delivered cautious commentary in an interview, and M&T Bank slumped on Wednesday after warning that customers were seeking out higher-yielding products and that there was muted activity in equity and debt capital markets.

"A sharp decline in Treasury yields and a deepening inversion across the yield curve suggest that recession risks have started to overshadow inflation in the eyes of investors, something corroborated by a range of leading economic indicators and the latest breakdown in oil prices," XM said.

The economic calendar is quiet ahead of next week's CPI release and FOMC decision, with only jobless claims set for release today.

Stocks to Watch

Carvana rose 2.4% in premarket trading. The stock dropped nearly 43% to a new low as an analyst raised fresh doubts about the company's viability amid a report that its creditors were preparing for a possible restructuring of its debt.

Culp swung to a loss on lower sales in the fiscal second quarter. Shares fell 8.7% in after-hours trading.

Cutera plans to offer $100 million of convertible senior notes due 2029 in a private placement. Shares dropped 13% after hours.

Design Therapeutics said results from a trial on the DT-216 treatment for patients with Friedreich ataxia showed that DT-216 was generally well-tolerated and able to overcome the frataxin transcription impairment that causes the disease. Shares fell 33% in after-hours trading.

GameStop reported a quarterly decline in sales and a narrower loss compared with a year ago. Its shares added 1.8% premarket.

Rent the Runway boosted its fiscal-year outlook after reporting higher revenue for the third quarter. Shares rose 20% premarket.

Sportsman's Warehouse shares dropped 6% off hours after it reported a decrease in same-store sales during the recent quarter.

Verint Systems lowered its revenue outlook for fiscal 2023. Its shares fell 2.4% off hours.

Economic Outlook

Muzinich & Co said it's a question of when, rather than if, the U.S. enters a recession.

Many commentators have suggested in recent weeks that the prospect of a soft landing in the U.S. remains a possibility, but "we don't believe this will be the likely scenario that plays out."

Muzinich expects economic resilience to support higher rates for longer and sees a technical recession in the U.S. likely in the second half of 2023.

"This is a result of the lag between the monetary action taken and the resulting impact on the economy, meaning it is likely we have still yet to pay for the decisions taken in 2022."

China Covid Uncertainties

Investors should watch out for remaining Covid uncertainties in China, despite rising optimism over officials' latest moves to significantly loosen pandemic curbs, KGI Asia said.

It reckons that China has by now largely relaxed domestic restrictions to an extent similar to most other countries. And from here, "one key point to focus on would be how Beijing deals with a potential infection surge" and how fast consumer spending can concretely bounce back after the new measures.

Many other analysts, including those at Morgan Stanley and HSBC, have also warned of a likely bumpy road as China reopens.

Forex:

December is normally a weak month for the dollar but it's likely to recover in the new year, ING said.

Preventing a larger correction is the fact the market's Fed interest-rate rise expectations haven't crumbled yet with the peak rate priced above 4.9% for next spring, keeping two-year Treasury yields above 4.25%.

"Short-end yields holding up here and the ongoing inversion of the U.S. curve is key to our call that the dollar can hold gains/bounce back into the first quarter of 2023."

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The euro rose after ECB chief economist Philip Lane said interest rates will need to rise several more times to tame inflation, but any gains should prove limited due to renewed energy concerns, ING said.

Overnight index swap pricing for the ECB's December 15 meeting increased to a 67 basis points rate rise on Wednesday from 54bp on Tuesday, ING said. However, a likely rise in gas prices due to northern Europe's current cold snap could cause EUR/USD's rally to stall around 1.05-1.06 this month.

"Higher gas prices are one of the key reasons we are not more bullish on EUR/USD next year," ING said.

Bonds:

The recent performance of the U.S. and eurozone government bond markets is somewhat exaggerated by now, Metzler said.

"In particular, 10-year Treasury yields below 3.5% no longer really fit the picture, in our view. While we don't know exactly where the bottom of this move is, we foreseeably expect a counter-reaction that should bring the overall U.S. curve back up at least around 20bp."

Prior to that, however, the market has to wait for next week's central bank meetings where once again it is not so much the decision per se, but the accompanying wording that is likely to be the deciding factor, Metzler said.

Energy:

Crude oil futures held solid gains in Europe on China reopening hopes, while higher stockpiles continued to keep prices below $80 a barrel.

"OPEC's unchanged production targets and larger-than-expected U.S. fuel stock builds have weighed on energy markets this week," Peak Trading Research said.

Brent is down 9% so far this week on the higher stock levels, but some impetus is coming from the fact that "China is officially relaxing its Covid policies, and the Chinese yuan is gaining versus the dollar, which helps U.S. export prospects."

Coal Outlook

Read Barrons.com Coal's Rally May Soon Burn Out. This Is What Could End It.

Metals:

Prices for base metals and gold wavered in London trading with China's reopening likely to provide a boost for demand, though rising Covid-19 cases remain a concern, while U.S. PPI data could move bullion.

Meanwhile, nickel surged 3.2% to $31,630, the highest level since May 2 as low liquidity remains a key concern driving volatile in LME-nickel. Traders are looking at other methods of pricing outside of the LME for battery grades because of the issues around pricing, according to an analysis from Fastmarkets.

Gold Outlook

Gold is on track to post a loss for the year--and the precious metal's performance in 2023 will greatly hinge on where the global economy is headed, according to a report from the World Gold Council.

Gold's performance in the new year will be "shaped by the intertwining effects of economic growth, inflation and monetary policy, with additional support from geopolitics and a likely softening U.S. dollar."

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