US Market Wrap - UoM inflation expectations rise; USD bid and yields rise

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  SNAPSHOT: Equities mixed, Treasuries down, Crude down, Dollar up.


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  REAR VIEW: UoM sentiment tumbles, inflation expectations rise; Hot Canada jobs, wages ease; Biden to quadruple tariffs on Chinese EVs; Fed speakers say it is too soon to cut, but Bostic still sees one cut this year; UK GDP beats; Strong TSM April sales.


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  WEEK AHEAD: Highlights include US CPI and Retail Sales, PBoC, China inflation and activity data, Japan GDP, Australian and UK jobs. To download the report, please click here
  


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  CENTRAL BANK WEEKLY: Previewing PBoC MLF; Reviewing BoE, RBA, Riksbank, BCB, Banxico, BoJ SOO and ECB Minutes. To download the report, please click here.

MARKET WRAP

Stocks were in a horizontal pattern heading into the US day, but tumbled after the University of Michigan's sentiment data plunged in May, while inflation expectations rose; Treasuries also sold off (the complex was hit following UK GDP data in premarkets, which exceeded expectations), with higher yields providing support for the USD. In afternoon trade, stocks trundled higher, without a specific catalyst. On the week, the S&P 500 was up 1.9%, the Nasdaq 100 was up 1.1%, booking a third straight week of gains for the first time since early February. Fed speakers generally reiterated their current views (see below). Attention now moves onto next week's Tier 1 economic releases, by way of the April CPI and retail sales data (on Wednesday), as well as an appearance from Fed Chair Powell on Tuesday.

US

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  UOM: The UoM prelim headline for May plunged to 67.4 from 77.2, well beneath the forecasted 76.0. Within the report, forward-looking expectations and current conditions both plummeted to 66.5 (exp. 75.0, prev. 76.0) and 68.8 (prev. 79.0), respectively. The closely followed inflation figures unwelcomingly rose, with the 1yr ahead at 3.5% (prev. 3.2%) and 5-10yr at 3.1% from 3.0%. On the headline, the large fall adds to some recent signs that the economy is softening, and while it may be signalling some genuine signs of emerging weakness in the labour market, while Oxford Economics notes “Ongoing methodological change in the index and the impact of higher gas prices in recent months mean we should be careful about placing a lot of weight on this one reading.” The consultancy adds, consumer confidence is volatile on a M/M basis and has not been an important driver of consumer spending in recent years, so the implications for its forecast are limited. Looking ahead, Oxford adds “the resilience of consumer spending is dependent on the strong state of household balance sheets and the robust labour market. Only if the latter begins to falter would we expect to see more meaningful signs of economic weakness emerge.”


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  FED'S BOWMAN (voter, hawk) stated that the Fed needs to keep policy steady for a bit longer, noting there is continued momentum in the economy.


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  FED'S BOSTIC (2024 voter, hawk) said he still feels the Fed is on track for a single cut this year though timing is uncertain. He is thinking less about the extent of 2024 cuts and more on the correct timing for the commencement of the cycle. He noted the majority of firms say that pricing power is at/near limit and that wage growth is returning to pre-COVID levels. The Atlanta Fed President is optimistic disinflation will continue, the Fed path to 2% could take until late-2025/early-2026. Job growth needs to slow to be consistent with the target, this does not mean unemployment will spike. Gains of above 175k jobs in April may be low for the COVID-era but are still above that the economy needs to account for population/labour force growth.


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  FED'S LOGAN (2024, hawk) stated the US is not a soft landing yet, acknowledging that Q1 inflation data was disappointing. She added that there are important upside risks to inflation, while there are also uncertainties if policy is sufficiently restrictive. She stressed it is too early to think about lowering rates and that the Fed needs to remain flexible on policy. Logan also noted that the neutral interest rate level may have risen. On risks, she said the events of March 2023 have impacted how the Fed should think about liquidity risks, adding she wants to see every bank testing the discount window on a regular basis; adds that safe and healthy banks use the liquidity window all the time, and that is a good thing.


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  FED'S GOOLSBEE (2025 voter, dove) reiterated data dependence, and given the uptick in inflation, Fed has to wait-and-see on policy. He was not surprised that the one-year inflation expectations were higher in the May University of Michigan report, and said there was not much evidence that inflation is stalling out at 3%. Goolsbee said that we hit an inflation bump this year, and now the Fed must wait, adding that he is hesitant to focus too much on recent inflation data. He added that the Fed was still trying to determine whether this is a bump, or getting stuck on inflation.


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  FED'S KASHKARI (2026 voter, hawk) said that the bar was high for another rate hike, but it cannot be ruled out. He is cautious about how restrictive monetary policy is. He said the he was in wait-and-see mode regarding the future of monpol.

FIXED INCOME

• TREASURY WRAP: T-Note (M4) futures settle 12+ ticks lower at 108-22+


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  Treasuries were sold on Friday with hot CAD jobs and rising consumer inflation expectations. 2s +6bps at 4.86%, 3s +6bps at 4.67%, 5s +6bps at 4.52%, 7s +6bps at 4.51%, 10s +5bps at 4.50%, 20s +5bps at 4.75%, 30s +4bps at 4.65%.


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  THE DAY: After peaking at 109-03+ on Thursday on the heels of rising jobless claims and the strong 30yr auction, T-Notes chopped sideways through the APAC session with 108-31 initially serving as support before brushing up against the Thursday peak again in the London morning, but failing to breach past it for a run on the WTD peaks of 109-09, although long end contracts did reach new post-auction peaks in light trade. EGBs and Gilts were on the front foot to kick off the London session, playing catch up to Thursday USTs despite the solid UK GDP figures.


• Better selling kicked in ahead of the NY handover, and as stateside trade got underway, T-Notes were making fresh lows. Fed's Bostic (voter) was on wires late in the London morning, reaffirming his view for one rate cut this year, but that didn't cause a move at the time. The downside appeared to be just the latest rotation in a week characterised by range trade, although the hot CAD jobs gave it some additional weight. 108-25 had served as support until the spiked higher in the Michigan survey consumer inflation expectations saw renewed selling. Contracts hit session lows of 108-21+ ahead of settlement.


• Looking ahead, the data slate picks up again next week with Wednesday's CPI the highlight: [Mon] NY Fed's SCE, [Tues] NFIB, PPI, [Weds] CPI, Retail Sales, Empire mfg., NAHB, [Thurs] Housing Starts, Import Prices, Philly Fed, Jobless Claims, Industrial Production, and [Fri] Leading Indicators. On Fed Speak: [Mon] Jefferson (v), Mester (v), [Tues] Powell, [Weds] Kashkari, [Thurs] Harker, Mester, and Bostic. There is no US coupon supply next week, although European scheduled fixed supply is expected to rise to EUR 32bln from 19bln this week, with Gilt issuance at GBP 3.6bln, and JGB issuance at JPY 3.3tln.

STIRS:

• SR3M4 +0.5bps at 94.71, U4 +1.5bps at 94.905, Z4 +2.5bps at 95.14, H5 +2.5bps at 95.38, M5 +3bps at 95.595, U5 +3bps at 95.765, Z5 +2.5bps at 95.88, H6 +3bps at 95.965, M6 +3bps at 96.015, M7 +3bps at 96.125, M8 +2.5bps at 96.11.


• SOFR at 5.31% (prev. 5.31%), volumes at USD 1.845tln (prev. 1.864tln).


• EFFR at 5.33% (prev. 5.33%), volumes at USD 77bln (prev. 78bln).


• NY Fed RRP op demand at USD 0.459tln (prev. 0.475tln) across 75 counterparties (prev. 73).


• US sells USD 80bln of 1-month bills at 5.270%, covered 2.93x; sells USD 80bln of 2-month bills at 5.275%, covered 2.98x.


• US leaves 42-day, 13-week, 26-week, and 52-week bill auction sizes unchanged at USD 75bln, 70bln, and 46bln, respectively; 13- and 26-week sold on May 13th, 42-day and 52-week sold on May 14th; all to settle on May 16th.

CRUDE

• WTI (M4) settles USD 1.00 lower at USD 78.26/bbl; Brent (N4) settles USD 1.09 lower at USD 82.79/bbl


• Crude futures slid at the end of the week, with oil seeing weakness on the broader Dollar strength in wake of the hotter than expected UoM inflation expectations. As such, WTI and Brent trundled to lows of 78.25 and 82.80, respectively, which is in contrast to the European morning, where they printed fresh WTD highs. Participants now await the next major catalyst, with Fed Chair Powell (Tues) and US CPI (Wed) eagerly awaited. On top of this, traders seemingly awaiting further impetus from the Israel-Hamas situation with Ukraine-Russia also coming back into heightened focus. Baker Hughes' weekly rig count noted total rig were -2 to 603, oil rigs -3 to 496, and natgas rigs +1 to 103.

EQUITIES

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  CLOSES: S&P 500 +0.2%, Nasdaq 100 +0.3%, Dow Jones +0.3%, Russell 2000 -0.6%.


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  SECTORS: Cons Discretionary -0.61%, Cons Staples +0.64%, Energy -0.55%, Financials +0.46%, Healthcare +0.22%, Industrials +0.08%, Materials +0.13%, Real Estate -0.4%, Technology +0.48%, Communications -0.15%, Utilities -0.16%.


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  EUROPEAN CLOSES: DAX +0.44% at 18,762, FTSE 100 +0.61% 8,432, CAC 40 +0.38% at 8,219, Euro Stoxx 50 +0.58% at 5,083, IBEX 35 +0.50% at 11,105, FTSE MIB +0.89% at 34,646, SMI +1.21% at 11,742.

EARNINGS:

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  Akamai Tech (AKAM): Revenue was light as was the outlook for both the next quarter and FY.


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  H&R Block (HRB): Top and bottom-line surpassed Wall St. expectations.


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  Guardant Health (GH): Shallower loss per share forecasted and revenue beat in addition to upping top line guidance.


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  Progyny (PGNY): Top line missed, with next quarter revenue guide light alongside cutting FY view.


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  Natera (NTRA): Posted a shallower loss per share than forecast, revenue beat and co. raised FY revenue outlook.


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  CRH (CRH): Posted a surprise profit per share and revenue topped expectations.


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  Victoria’s Secret (VSCO): Provided an upside Q1 prelim announcement.

STOCK SPECIFICS:

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  Novavax (NVAX): Signed a licensing agreement with Sanofi (SNY, SAN FP) that includes commercializing a combined COVID-19 and flu shot.


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  3M (MMM): Upgraded at HSBC.


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  Moderna (MRNA): FDA informed Co. that due to administrative constraints it will not complete its review of MRNA-1345 by PDUFA date of May 12.


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  Chinese EVs (XPEV, NIO, LI): US President is to quadruple tariffs on Chinese EVs, according to WSJ.


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  TSMC (TSM): April (TWD) Sales 236bln, +20.9% M/M (vs. March'24 195.21bln).


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  Alphabet (GOOGL): OpenAI plans to announce its Google search competitor on Monday, according to sources; later, OpenAI's Altman said OpenAI was working on some "new stuff", but it is not GPT-5 and it is not a search engine.


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  McDonald's (MCD) - Plans USD 5.00 meal deal in an effort to lure customers back to stores, Bloomberg reports.

US FX WRAP

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  USD - The Dollar was bid on Friday despite the woeful preliminary UoM May survey, which fell well beneath expectations. The upside in the Buck was a result of the hot inflation expectations component, where the 1yr gauge rose to 3.5% from 3.2%, and the 5-10yr rose to 3.1% from 3.0%. There were several Fed speakers too, Bostic (2024 voter, hawk) spoke this morning, noting he still feels the Fed is on track for a single rate cut this year, but the timing is uncertain. Goolsbee (2025, dove) reiterated a wait-and-see approach; Kashkari (2026, hawk) said the bar to rate hikes was high, but could not be ruled out; Bowman (voter) later added the Fed needs to keep policy steady for a bit longer. Logan (2024 voter) said it is too early to think about lowering rates. Attention turns to next week's US CPI and Retail Sales data, and remarks from Fed Chair Powell on Tuesday.


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  EUR - The Euro saw marginal weakness with the latest ECB minutes revealing little new information, with the aforementioned price action in the Dollar dominating.


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  GBP - The Pound was flat vs. the Buck and Euro despite stronger than expected GDP data which briefly supported the Pound. There were further remarks from BoE Chief Economist Pill, but he echoed what was said post BoE on Thursday, noting the MPC has sent a relatively clear signal that inflation can be lowered when there is sufficient evidence of a downward path in persistent components of inflation.


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  CAD - The CAD was the outperformer after a stellar April jobs report. Headline jobs rose by 90k, well above the 18k forecast with full time jobs being responsible for 40k of those, and part time jobs the remaining 50k. The unemployment rate was unchanged at 6.1% despite forecasts for an uptick to 6.2%. Wages meanwhile eased to 4.8% from 5.0%.


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  JPY - The Yen was softer against the Dollar with the hot US inflation expectations weighing on the Yen, as did higher UST yields. Note, Bank of America has brought forward its BoJ rate hike expectations, and now sees a July move.


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  AUD, NZD - Antipodes sold off despite the continued upside in equities with the hot UoM inflation expectations offsetting any cyclical gains in either the Aussie or Kiwi. For the Kiwi specifically, the New Zealand Manufacturing PMI rose to 48.9 (prev. 47.1).


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  NOK - NOK saw some modest strength in the European morning after a hotter than expected inflation report with NOK gains limited, perhaps due to the data, once again, coming in cooler than the Norges Bank's forecast.


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  EMFX - In EMFX, BRL was flat vs the Greenback, with a relatively inline inflation report for April where IPCA Inflation Index eased Y/Y but accelerated M/M. MXN was also flat, Industrial production data disappointed expectations. Elsewhere, CZK was flat vs the Euro but CNB's Holub said there is insufficient evidence to change the assumed 1% neutral real interest rate levels within the baseline forecasts; note, the Czech unemployment rate ticked up to 3.7% in April, in line with forecasts.

10 May 2024 - 21:16- EquitiesResearch Sheet- Source: Newsquawk