Rollercoaster stock ride, globally hot CPI reports, earnings, US housing data, BOC to hike, yields reverse, bitcoin struggles

Stocks went on a wild ride as global bond yields reacted to a steady stream of hot global inflation reports, decent earnings, all while the Nasdaq tentatively fell to correction territory.  Inflation in both Canada and the UK hit the highest level in three decades. There is a 75% chance the Bank of Canada will hike interest rates next week and the BOE should deliver a second rate hike at the next meeting on February 3^rd.  The yield on 10-year bunds turned positive for the first time since April 2019, but that move was overdone as the ECB remains heavily active this quarter.

Earnings

Bank of America earnings weren’t too bad as profit came in better than expected, trading revenue didn’t miss by too much, and the company expects to keep costs flat in 2022.  The second-biggest US bank is committed to spend on new technology and offer competitive compensation.  No specific guidance was given with Net Interest Income, but the consumer bank was optimistic with loan growth.

Procter & Gamble delivered solid earnings results as the consumer giant was able to pass on costs to the consumer.  It was an impressive quarter of strong top-line growth despite surging commodity and transport costs.  Executives signaled more price increases are on the way and that should suggest 7% is here to stay a little while longer.

US Data

US homebuilding unexpectedly hit a nine-month high in December as many Americans rush to buy homes before borrowing costs continue to surge.  The rush to secure a mortgage has motivated many Americans and that probably explains the rising trend in mortgage applications.  December housing starts increased to 1.702 million, a beat of the 1.650 million consensus estimate and building permits rose 1.873 million, much better than the 1.703 million forecast.  The housing sector remains hot and that should be the case going into the summer.

FX

The Bank of Canada should have the green light to raise rates next week after Canadian inflation surged to the highest level since 1991. The loonie is becoming a favorite swing trade on expectations that the BOC will raise rates a handful of times this year and as oil prices should be well supported going into the summer.

Treasury Yields rally but then retreat

Treasury yields rallied early but found strong resistance at the 1.90% level.  For yields to continue to surge, Wall Street is going to need added confirmation from the Fed that 5 rate hikes are on the table and that the balance sheet reduction could have USD 500 billion runoff this year.

The 20-year Treasury auction went well as demand was strong.  The high yield was 2.210% and the bid-to-cover was 2.48.  Treasury yields edged lower after the auction.

Crypto

Bitcoin isn’t doing much of anything, still hovering above USD 40,000 and down around 9% on the month.  SEC’s Gensler reiterated that the SEC remains focused on regulating crypto exchanges and that climate risk and ESG rules are key priorities for the year. The news flow was rather quiet for bitcoin, but it is a little disappointing to not see bitcoin react more positively to the reversal in Treasury yields.

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