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.

TODAY'S AGENDA:

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.

EQUITY NEWS:

TECH:

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  Apple (AAPL), Microsoft (MSFT) - Apple has limited the use of OpenAI's ChatGPT and other external AI tools by its employees due to concerns about data leaks. They have also advised against using GitHub's Copilot for software code writing. OpenAI is backed by Microsoft, and Microsoft is also the owner of Github.


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  Microsoft (MSFT), Twitter (private) - Twitter accused Microsoft of improper data usage and violation of their agreement, NYT reports. The social media company claimed that Microsoft used more data than allowed and shared it with government agencies without permission.


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  Applied Materials (AMAT) - Q2 adj. EPS 2.00 (exp. 1.84), Q2 revenue USD 6.63bln (exp. 6.38bln). Exec said it expects to outperform its markets in 2023, longer-term outlook was very positive as semiconductors become a larger and more strategically important market globally. Expects capital expenditures to be higher over the next several years, but adds that there is no change to its longer-term financial model. Sees Q3 Adj. EPS USD 1.56-1.92 (exp. 1.58). Sees Q3 rev. 5.75bln-6.55bln (exp. 5.86bln)


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  Analog Devices (ADI) - CFO Mahendra-Rajah will step down from his position to explore other opportunities. Prashanth will remain with ADI through the end of the fiscal year to ensure a seamless transition to new financial leadership.


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  DXC Technology (DXC) - Rob Del Bene appointed Executive Vice President and Chief Financial Officer. Reports Q4 adj. EPS of 1.02 (exp. 1.03), and Q4 revenue USD 3.59bln (exp. 3.62bln). Announces a new USD 1bln share buyback authorisation, after its previous programme concluded in April. Q1 adj. EPS seen between USD 0.80-0.85 (exp. 0.92), and sees Q1 revenue between USD 3.54-3.58bln (exp. 3.61bln). For the FY24 period, sees adj. EPS between 3.80-4.05 (exp. 3.98), and revenue between USD 14.4-14.55bln (exp. 14.5bln).

COMMUNICATIONS:

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  Disney (DIS) - Disney is removing some shows from its Disney+ streaming service, and has decided not to renew certain programmes in an effort to save costs, Bloomberg reports, and part of its push to make its streaming service profitable.


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  Meta Platforms (META) - Meta will begin its next round of lay-offs next week, VOX reports. The layoffs will primarily affect Meta's business departments and may impact a significant number of employees.


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  Twitter (private), WPP (WPP) - WPP-owned GroupM informed clients that Twitter is no longer considered “high risk” following the appointment of Yaccarino as CEO, FT reports.


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  ByteDance (private) - TikTok users sued Montana over the state's new TikTok ban, claiming it violates their First Amendment rights and exceeds state authority. The ban aims to protect personal information from the Chinese government due to TikTok's ownership by ByteDance.


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  AT&T (T) - Shareholders vote against a proposal to adopt an independent board chairman policy.

CONSUMER:

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  Ross Stores (ROST) - Q1 EPS 1.09 (exp. 1.06), Q1 revenue USD 4.49bln (exp. 4.5bln), Q1 SSS +1.0% (exp. +0.7%). Said it remains on track to buy back a total of 950mln in common stock during FY23. Sees Q2 EPS between 1.07-1.14 (exp. 1.25), and sees Q2 comp sales growth "relatively flat". Backs FY outlook for revenue, but narrows its FY EPS view to 4.77-4.99 from 4.65-4.95.


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  Farfetch (FTCH) - Q1 adj. EPS -0.16 (exp. -0.42), Q1 revenue USD 556.4mln (exp. 512.7mln). Exec noted sequential improvement in GMV growth in the US and China, its two largest markets, as well as in orders across the Farfetch Marketplace.


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  Flowers Foods (FLO) - Q1 adj. EPS 0.38 (exp. 0.38), Q1 revenue USD 1.534bln (exp. 1.55bln). Exec said product mix continued to return to more normalised levels as consumers dined out of the home more frequently, adding that private label category sales remained strong, though the growth rate was moderating. It lowering outlook to account for the slow start to the year and lower-than-expected branded retail sales due to softer category demand. Lowers FY EPS outlook to 1.15-1.25 (exp. 1.25) from 1.20-1.30, and cuts its FY revenue outlook to between USD 5.086-5.141bln (exp. 5.2bln) from 5.18-5.24bln.


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  Tesla (TSLA), Xiaomi (XIACY) - Xiaomi founder Lei June visited a Tesla shop, and reportedly "checked out" a Model X. It has been previously reported that Xiaomi plans to develop a battery-powered midsize sedan to take on Tesla’s Model 3.


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  Entain (GMVHY) - Is reportedly nearing a deal to buy a sports pricing and analytics firm for roughly USD 200mln, according to Business Insider citing sources.

FINANCIALS:

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  Fed Discount Window - Loans at the Fed's Discount Window stood at USD 9.05bln in week ending May 17th, down from 9.32bln prior week; BTFP lending was at USD 87bln (prev. 83.1bln W/W), while the Other Credit item was at 208.5bln (prev. 212.5bln W/W).


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  Lazard (LAZ) - CEO Ken Jacobs is set to resign as the investment bank aims to improve its performance, WSJ reports. Peter Orszag, who currently leads Lazard's financial-advisory unit and previously served in the Obama administration, is likely to replace Jacobs. Jacobs intends to stay at the company and continue assisting clients, the transition is not finalised, and Lazard might alter its plans, WSJ added.

ENERGY:

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  Occidental Petroleum (OXY), Berkshire Hathaway (BRK.B) - Berkshire Hathaway continues to purchase more Occidental stock, and purchased another 200mln worth, increasing its stake to USD 12.7bln, or just under 25%, Barron's reports. Berkshire has been buying Occidental stock since early 2022 and Warren Buffett has expressed admiration for the company's CEO, but recently said that he had no intention of controlling Occidental.

MATERIALS:

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  Alcoa (AA) - Alcoa and United Steelworkers ratified a new collective bargaining agreement that covers employees at its aluminium smelters in the US. The new three-year agreement master agreement covers approximately 860 active employees in Indiana and in New York.


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  Newmont (NEM) - Newmont announced the appointment of Karyn Ovelman as Executive Vice President and Chief Financial Officer.

INDUSTRIALS:

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  Lockheed Martin (LMT), Raytheon (RTX) - The Biden administration signalled to European allies in recent weeks that the US would allow them to export F-16 fighter jets to Ukraine, while Ukraine was said to have used a Patriot to shoot down at least one Russian fighter jet in recent weeks, according to CNN.

HEALTH CARE:

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  Thermo Fisher (TMO) - FDA for the first time cleared a test to gauge a mother’s risk of severe preeclampsia, a leading cause of pregnancy-related illness and death in the US, WSJ reports. TMO said Thursday that the blood test it already sells in Europe could be available in the US soon. Medical professionals have said that its introduction could transform prenatal care in the US.

19 May 2023 - 09:01- Data- Source: Newsquawk