US EARLY MORNING: Equity futures are just off YTD highs ahead of Fed Chair Powell

OVERNIGHT: On Wall Street, stocks firmed on Thursday, with the tech sector doing much of the heavy lifting. The positive mood was driven by constructive economic data, and easing concerns around the US debt ceiling negotiations, while there weren't any major stresses in Regional Banks after hawkish Fedspeak. Our US wrap is here. Overnight in Asia, stocks were mostly higher following the lead from Wall Street, though China markets lagged after disappointing sales stats from Alibaba. Japan's CPI figures were mostly in line with expectations, but showed a faster pace of acceleration. Pantheon Macro said the BoJ will recognise the likelihood of further food price hikes, as well as the economy’s tentative rebound in Q1, but is unlikely to make any significant policy changes at its June 16th meeting. Our APAC wrap is here. European equity indices start the last trading session of the week on the front foot, and are currently on course to snap a three-week run of lower weekly closes. Data out of Germany showed producer prices rose +0.3% M/M in April (exp. -0.5%), while the annual rate slipped from 6.7% Y/Y in March to 4.1% in April (exp. 4.0%). In wake of the data, immediate downside was seen in Bund futures. Meanwhile, in the UK, GfK reported that consumer confidence was at -27 in May (exp -27.0) from -30.0 in April, printing the fourth consecutive monthly increase. Our European cash open note is here.

US PRE-MARKETS: US equity futures are around flat following Thursday’s solid rally (see analysis below), though are holding above 4,200. Treasury yields are lower, with the front-end outperforming ahead of key central bank speak due today from Fed Chair Powell, NY Fed President Williams, and Governor Bowman (see Day Ahead, below, for our preview). The Dollar Index is slightly beneath neutral amid reports that Chinese state-owned banks were reportedly swapping Yuan for Dollars in the onshore FX forwards market, which some said was a strategy to sweep up dollars from the swap market to reduce availability for yuan sales, a tactic used in previous episodes of yuan depreciation. Crude futures are being underpinned by the constructive risk tone.

S&P 500 UPSIDE BREAK: The S&P 500 finally broke out of its horizontal ranges on Thursday to print fresh YTD highs, and futures are maintaining ground above 4,200 in pre-market trading. However, the upside has triggered some scepticism. Bloomberg's venerable markets commentator John Authers notes that Thursday's rally does not seem to be a function of earnings or rates; better liquidity conditions may be a driver, while the AI hype may be encouraging some, but Authers ultimately concludes that the rally is running on hope as well as the AI story. Meanwhile, Capital Economics points out that this year’s rally, where the S&P 500 is up over 9%, has mostly been driven by a few large-cap stocks, while others have shown limited gains or even declines. Its analysis shows that the top five stocks in the index have contributed 80% of the overall gains, returning approximately 40% since the end of 2022, while around 70% of index constituents have seen lower price increases than the index, with around half falling and a quarter dropping by more than 10%. CapEco says this trend is unlikely to continue. That said, from a technical perspective, Fundstrat's strategists say that this week’s breakout is constructive and will likely lifts the index towards resistance between 4,235-4,275, and then possibly towards 4,325 before we see consolidation set in again.


DAY AHEAD: The Day Ahead is thin for scheduled data releases. Canadian retail sales are expected to extend their slump in March. Traders will also be watching the key weekly rig count data from Baker Hughes, after last week's release triggered a move in crude futures. On the credit ratings docket, Moody's is to review Italy (Baa3), and S&P will review South Africa (BB-). The docket is busier for central bank speakers, especially for influential Fed voters; today will feature remarks from Chair Powell, who will participate in a panel discussion with former Fed Chair Bernanke (we have a primer here), NY Fed's Williams, and Fed Governor Bowman (the latter two are due to speak in the US pre-markets). There are also influential ECB speakers on today's agenda, with President Lagarde and the central bank's markets honcho Schnabel scheduled to speak. Meanwhile, from the Old Lady, BoE hawk Haskel will give remarks. Our full interactive day ahead calendar can be accessed here, a pdf version can be accessed here.

PREVIEW - FED CHAIR POWELL (16:00BST/11:00EDT): Fed Chair Powell, who has not spoken since the May FOMC meeting, will be participating in a discussion with former Fed Chair Bernanke on ‘Perspectives on Monetary Policy’. At his post-meeting press conference, Chair Powell reiterated that the central bank was committed to bringing inflation down to 2% and that the Fed was taking a data-dependent approach to rate hikes, adding that the Fed believes it may be near the end of the rate-hiking cycle. Powell revealed that some policymakers had discussed pausing rate hikes, but not at the May meeting. He emphasised that cutting rates would not be appropriate soon. Meanwhile, Powell said that the banking sector had improved, and banks were tightening lending standards, with the pace of lending slower. In future meetings, the Fed will be focussing on credit tightening in its assessment, and determining whether the policy stance is sufficiently restrictive. He added that more data was needed to determine if the Fed has reached a sufficiently restrictive stance. Powell also said that inflation was still high, and is unlikely to come down quickly. Inflation remains higher than desired, although it has moderated somewhat. The labour market is tight but it is showing signs of balance, with nominal wage growth easing. Non-housing services inflation has not changed significantly, while activity in the housing sector remains weak. Some have been noting some subtle changes in recent Fedspeak, where a divergence of views could be emerging. Fed's Williams (perma voter) was advocating for a wait-and-see approach on rates, Fed Governor Bowman took a hawkish tone, saying additional rate hikes are likely appropriate. Goolsbee (voter) said it was too soon to be talking about the Committee's next decision, but he was cautious about the May 25bp hike (which he ultimately voted for). Kashkari (voter) said the Fed has more work to do, while Bostic (2024 voter) said there was still a ways to go to beat inflation. Fed’s Logan (voter) argued that the data does not yet show that skipping a rate hike in June is appropriate, while Fed Vice Chair nominee Jefferson spoke about how inflation remained too high, but a year was not enough time to assess the full impact of hikes thus far. Meanwhile, the influential hawk Bullard (non-voter) said he will keep an open mind going into the June meeting, but was inclined to support another rate hike.

DEBT CEILING: White House officials have indicated that President Biden is confident Congress will take action to prevent a US default, following a call with the debt ceiling negotiation team. Negotiators said progress was being made in talks. Senate Majority Leader Schumer said that debt limit discussions were advancing, and the Senate is ready to act after the House. Democratic Senator Sinema expressed growing confidence in reaching a debt agreement. US House Speaker McCarthy Thursday said that the House could vote next week if an agreement is reached. However, House Republican members of the Freedom Caucus insisted that the Senate must pass the House GOP debt limit package, and called for a halt in talks until the Senate acts. House GOP McHenry suggested that there is still a considerable way to go in debt ceiling negotiations. A group of Democratic Senators advised Biden to be prepared to use the 14th Amendment to avoid a default; the amendment essentially frames any debt default as unconstitutional, a move that has been avoided by Presidents in the past given the constitutional crisis it might trigger.










19 May 2023 - 09:01- Research Sheet- Source: Newsquawk

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