US equity futures dropped on Tuesday ahead of today's critical debt ceiling discussions in Washington and weighed expectations of more easing after China’s data showed the recovery there is rapidly losing momentum. Both S&P 500 and Nasdaq futures down -0.1% at 7:45am ET, but off the best and worst levels of the session. Treasuries are up ahead of the debt-ceiling talks with the Bloomberg dollar index slightly weaker, while oil is extending yesterday’s gains. Iron ore is up this morning, while gold is lower.
“Markets are still absorbing some of this morning’s earnings reports, but today’s China data was a little disappointing which is prompting some weakness in luxury retail and basic resources,” said Michael Hewson, chief market analyst at CMC Markets UK.
In premarket trading, Home Depot dropped as much as 5.5% market after cutting its full-year guidance and reporting comp sales that missed the average analyst estimate. The company blamed softening consumer demand, lumber deflation and unfavorable weather, particularly in California, for the sales shortfall. Home-improvement retailer peer Lowe’s, which reports results May 23, fell in sympathy. Shares of RH fell 4% after Berkshire exited its position in the home furnishing company. On the other end, Capital One rose as much as 6.7% in premarket trading as Berkshire Hathaway's 13F showed the conglomerate added the stock to its portfolio in the first quarter. Here are some other premarket movers:
The rally in US stocks has stalled in May, as investors fret over sticky inflation and the impact on growth from higher-for-longer interest rates. Continuing negotiations over the debt ceiling are also putting a lid on risk appetite, with Treasury Secretary Janet Yellen warning again that the US is already paying a price for its failure to raise the federal debt limit.
Two Federal Reserve officials this week signaled they favored pausing interest-rate increases, while a third policymaker said the central bank’s task in subduing inflation was not complete. “We do believe the Fed will pause for now, seeing how everything flows through the economy, but we still don’t believe the Fed will cut at the end of the year unless we have a severe recession or inflation back to 2%, which as you know is not our base-case scenario,” said Fabiana Fedeli, chief investment officer for equities and multi assets at M&G Plc, in a Bloomberg TV interview.
“Macro numbers are weakening but not falling off a cliff, so for now we still think yes there will be slowdown, but we are not seeing anything as harsh as some out there are expecting,” she said.
Sentiment among global fund managers in May deteriorated to the most bearish this year, with 65% of survey participants now expecting a weaker economy, Bank of America’s latest monthly Fund Manager Survey showed. At the same time, almost two thirds of investors see a soft landing as the most likely scenario for global economic growth and expect only a small contraction in earnings. Most surveyed fund managers expect the US debt ceiling to be raised by the so-called X-date.
“The debt ceiling should be really bad if we don’t get a solution, but also not supportive if we get a solution — a short-term relief due to over-hedging, but medium term a liquidity drag,” said Ulrich Urbahn, head of multi-asset strategy and research at Berenberg. “When the debt ceiling is raised and the Treasury Department begins refilling its Treasury General Account with more bond issuance in the second half, then that would likely be very bad for liquidity, assuming the Fed is still doing QT at that point. That would be a negative double-whammy for liquidity.”
UBS Global Wealth Management strategists led by Mark Haefele said in a note that they see risk-reward for US equities as “unattractive” amid slowing economic growth and weakening consumption. In a soft landing scenario, the S&P 500 could rise to 4,400 by year-end, but if the economy slips into a recession, the market could fall to 3,300.
“We are all looking to Congress and the White House to see how the US debt ceiling discussions are moving ahead,” said Joachim Klement, head of strategy, accounting and sustainability at Liberum Capital. “Now that we have sufficient clarity on central bank policy and are close to the rate hike cycle peak, investors are looking for clarity on the political front before the coming earnings season.”
At the same time, traders have hedged worst-case scenarios by parking in cash, Treasuries and tech stocks, according to Bank of America Corp.’s latest survey. If the latest debt-ceiling episode plays out like 2011, Treasuries could be a big beneficiary in the run-up to the June 1 deadline.
Looking at today's main macro event, US retail sales may have bounced back in April, boosted by autos (see our preview here). Consensus sees a 0.8% gain after March’s revised 0.6% slump. But Bloomberg Economics said a shift in consumer demand from goods to services signals a rocky road ahead for retailers.
In Europe, stocks were off their worst levels but still nursing minor declines as the ongoing US debt-ceiling negotiations keep broader risk sentiment in check. The Stoxx 600 is down 0.1% with losses in autos and banks offsetting gains in utilities and tech. Technology shares were the biggest gainers. Telecom stocks dragged down the index, punctuated by a loss of as much as 5.4% in Telecom Italia SpA shares. Here are Europe's biggest movers:
Earlier in the session, Asian stocks rose as Japan’s Topix benchmark climbed to the highest in more than three decades, even as worse-than-estimated economic data from China dragged on its mainland-traded equities. The MSCI Asia Pacific Index gained as much as 0.6%, with technology names TSMC, Samsung Electronics and Tencent among the top contributors. Taiwan and Philippine markets were among the best performers. Chinese stocks fell in Shanghai and Shenzhen after official data showed industrial output, retail sales and fixed investment all missed estimates in April. Analysts forecast more policy support later this year.
Japan’s benchmark Topix has climbed 12% so far this year, beating the MSCI Asia Index’s 4.3% gain and a 7.7% advance in the S&P 500. The Topix has climbed to the highest since 1990. A renewed push by Japan’s corporates to increase buybacks and focus on returns is helping boost sentiment, with the Nikkei 225 Stock Average leading gains among Asia’s major benchmarks in 2023. A weakening yen and solid earnings are among factors that have boosted Japanese stocks, with Goldman Sachs among strategists seeing more gains to come. “The last 1-2 weeks were earnings peak season, and good results supported share prices,” said Rie Nishihara, chief Japan equity strategist at JPMorgan Chase & Co. “The announcement of share buybacks and dividend hikes by companies will end after May 15, so we think Nikkei will settle down before reaching 30,000 yen.”
“We believe Japanese stocks still have further to go,” Fabiana Fedeli, chief investment officer for equities and multi assets at M&G Plc, said on Bloomberg Television. “Companies in Japan were improving their balance sheets and were giving back to shareholders in terms of buybacks and dividends.”
Indian stock markets were among the worst performers in Asia on Tuesday as shares of financial services and consumer companies extended declines into the end of the session. The selloff in local markets stood in contrast to gains from most Asian markets despite signs China’s economic recovery is losing momentum. The MSCI Asia-Pacific Index closed 0.4% higher. The S&P BSE Sensex fell 0.7% to 61,932.47 in Mumbai, while the NSE Nifty 50 Index declined 0.6% to 18,286.50. A sub-gauge of financial stocks fell 0.5% while BSE Consumer Discretionary index slid 0.4%. HDFC Bank contributed the most to the Sensex’s decline, decreasing 0.6%. Out of 30 shares in the Sensex index, 14 rose, while 16 fell.
Australian stocks feel: the S&P/ASX 200 index dropped 0.4% to close at 7,234.70 in broad declines, with consumer staples and tech sectors falling most. Australia’s consumer confidence tumbled in May after the Reserve Bank unexpectedly raised interest rates and the government handed down a budget that households found “mildly disappointing.” Read: Australia’s Consumer Confidence Slumps on Rate Hike and Budget In New Zealand, the S&P/NZX 50 index was little changed at 11,945.87.
In FX, the Bloomberg Dollar Spot Index is down 0.1%. The Swiss franc is the best performer among the G-10 currencies, rising 0.4% versus the greenback. The pound fell but losses were short-lived with cable since reclaiming the $1.25 handle and now trading higher on the day.
In rates, treasuries advanced across the curve with gains led by belly as 5s30s spread pushes to fresh session wides. Treasury yields richer by nearly 5bp across belly of the curve with 5s30s spread steeper by 2bp on the day; 10-year yields around 3.465% with gilts outperforming by additional 2.7bp in the sector. IG issuance slate includes Cades 5Y and JICA 5Y; 12 issuers priced almost $15b Monday; also, Pfizer mandated banks and announced investor outreach for what’s anticipated to be the financing component for its $43b Seagen acquisition. Bond sale could be in the $25b-$30b range as soon as Tuesday, according to Bloomberg. Gilts outperformed following an unexpected drop in UK payrolls data that prompted traders to pare bets for further BOE interest-rate hikes. Gilts are leading US and German counterparts higher after disappointing jobs data. UK two-year yields are down 8bps at 3.75% amid a slight dovish shift in market pricing for the Bank of England. In US session, focal points include retail sales data, several Fed speakers and potential announcement of a Pfizer jumbo bond offering.
In commodities, crude futures decline with WTI falling 0.5% to trade near $70.70. Spot gold falls 0.3% to around $2,010. Bitcoin drops 0.9%.
EU Council Finance ministers unanimously approved the Markets in Crypto Assets regulation (MiCA) and anti-money laundering rules "that could make it one of the first major jurisdictions to regulate the sector", according to CoinDesk; as expected.
Looking to the day ahead now, and data releases include US retail sales, industrial production and capacity utilisation for April, along with the NAHB housing market index for May. Elsewhere, we’ll get the German ZEW survey for May, Canadian CPI for April and UK unemployment for March. From central banks, we’ll hear from ECB President Lagarde and the ECB’s Makhlouf, along with the Fed’s Mester, Barr, Williams, Goolsbee, Logan and Bostic. Finally, today’s earnings releases include Home Depot.
Market Snapshot
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A more detailed look at global markets courtesy of Newsquawk
APAC stocks traded mixed and only partially sustained the momentum from Wall St where stocks were led higher amid a short squeeze in US regional banks albeit with the upside capped by a disappointing NY Fed Manufacturing survey and debt ceiling concerns, while markets digested weaker-than-expected Chinese activity data. ASX 200 was lower as weakness in the tech and consumer sectors overshadowed the resilience in the commodity-related industries and with risk appetite also dampened by a deterioration in consumer confidence. Nikkei 225 strengthened as earnings results continued to take centre stage in Tokyo including Japan’s megabanks and after the TOPIX climbed to a fresh 33-year high. Hang Seng and Shanghai Comp. were varied with Hong Kong underpinned by strength in tech after it was reported that ‘Big Short’ investor Michael Burry boosted his bullish bets on e-commerce giants JD.com and Alibaba, while the mainland was choppy after disappointing activity data from China in which Industrial Production, Retail Sales and Fixed Assets Urban Investment all missed analysts’ forecasts.
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European bourses are little changed but with a slight positive bias, Euro Stoxx 50 +0.1%, as macro drivers are limited and a downbeat/mixed ZEW only saw a modest trimming of initial performance. Sectors, are mixed with Tech and Utilities leading while Consumer Products/Services and Autos/Parts are the relative laggards. Stateside, futures were essentially unchanged ahead of numerous Fed speakers with broader attention on upcoming debt ceiling talks between President Biden & McCarthy with the ES just below 4150. However, the Q1 report from Home Depot (-4.0% pre-market) has resulted in some modest pressure, with US futures dipping into negative territory after the bellwether reports and misses on comp sales.
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Fixed Income
Commodities
Geopolitics
US Event Calendar
Central Bank Speakers
DB's Jim Reid concludes the overnight wrap
Since the aftermath of the SVB failure in March we've been in an interesting and quite tight lower yielding range for bonds. When nothing much happens newsflow wise, yields want to edge up towards the top of the range and then when something negative happens (e.g. the FRB resolution and stress at other regionals) yields fall to the downside. Meanwhile equities are in a remarkably steady range at the moment, with the S&P 500 trading in just a 1.5% range over the last 6 sessions and about a 3.5% range over the last month (which includes the FRB stress and resolution).
That pattern has held over the last 24 hours with bond yields edging higher but equities still quiet. Bonds sold off (10yr US yields +3.9bps) yesterday thanks to hawkish remarks from Federal Reserve officials alongside continued concerns about the US debt ceiling. Regional banks were higher too which helped. With regards to the debt ceiling, after a holding pattern on this story over recent days, we should finally get some information today on how the negotiations are evolving, since it’s expected that President Biden will meet with Republican House Speaker McCarthy again. Publicly at least, the mood music has sounded more positive from the Democrats than the Republicans. For instance, President Biden said over the weekend that “I remain optimistic” and that “I really think there’s a desire on their part as well as ours to reach an agreement”. However, yesterday saw Republican Speaker McCarthy say that the two sides were “far apart” in the talks and that the Democrats were “not talking anything serious”. There continues to be posturing in the media from both parties as one GOP member who helped write the House Bill said there were three “red lines” for Republicans; no clean debt increase, no tax increase, and the bill must reduce the deficit. After the US close, Treasury Secretary Yellen in a letter to Congressional leaders reinforced that “we still estimate that Treasury will likely no longer be able to satisfy all of the government’s obligations if Congress has not acted to raise or suspend the debt limit by early June, and potentially as early as June 1”. Our rates strategists and economists have moved their base case up to early-June as well, see their note here
We’ll have to see how today pans out, but it’s clear that investors are still nervous about the issue, since the yield on 1-month T-bills rose a further +11.2bps yesterday, taking them up to a new cycle high of 5.531%. That’s a big kink at the front of the yield curve centred around the 1-month mark, which is when fears of a potential default are at their highest. Given an early-June x-date to avoid default, the key players might only have just over a couple of weeks to reach some sort of deal. Remember as well that as it stands, President Biden is going to set off tomorrow for several meetings over the week ahead, including the G7 leaders’ summit in Japan on May 19-21 and the Quad summit in Australia on May 24. So if the deadline does arrive on the early side of estimates, then there really isn’t that long left when all the key people will be in Washington.
Whilst Treasuries were heavily selling off at the very front end, they didn’t exactly perform well at longer maturities either, with yields on 10yr debt up +3.9bps on the day to 3.502%. They are a couple of basis points lower in Asia though. Yesterday’s moves came amidst several Fed speakers who pushed back on the idea that the Fed were about to reverse rates anytime soon. For instance, Atlanta Fed President Bostic said that his baseline was that “we won’t really be thinking about cutting until well into 2024”, which is at odds with market pricing that’s expecting 94bps of cuts by the time of the January 2024 meeting. Later on, Minneapolis Fed President Kashkari said that “We at the Federal Reserve probably have more work to do on our end to try to bring inflation back down”. That saw investors price out some of the rate cuts they’d been expecting this year, with the rate priced in by the December meeting up by +2.8bps to 4.410%. In fact, fed futures yesterday pointed to a 20% of a hike during the June meeting, which is the highest it has been in 2 weeks. One dovish exception yesterday came from Chicago Fed President Goolsbee, who mentioned that there was “still a lot of the impact of the 500 basis points we did in the last year that’s still to come”, so explicitly warning of policy lags.
This backdrop saw equities move slightly higher, with the S&P 500 (+0.30%) posting a moderate advance. This was largely on the back of better cyclicals with semiconductors (+2.4%), banks (+1.9%), and materials (+0.9%) leading the way at the expense of defensives like utilities (-1.2%) and telecoms (-1.0%). The KBW Banks Index (+2.56%) saw decent gains following 4 weekly declines in a row. There was a +11.98% rise for Western Alliance Bancorp. Earlier European equities also ended the day in positive territory, with the STOXX 600 up +0.25%.
In other positive news, yesterday saw the relentless decline in European natural gas prices continue, with a further -1.38% decline to €32.31/MWh. That’s their lowest closing level since July 2021, and leaves them down by more than 90% since their peak last August. The picture for the winter ahead is looking increasingly optimistic, and storage levels are also above their seasonal averages for this time of year. Despite the better outlook on the inflation side though, European sovereign bonds traded in line with their US counterparts, with yields on 10yr bunds (+3.3bps), OATs (+2.6bps) and BTPs (+0.5bps) all rising on the day.
On the other hand Brent crude prices rose +1.43% to $75.23/bbl and WTI gained +1.53% to $71.11/bbl as news came out that the US would be filling the Strategic Petroleum Reserve with 3 million barrels of oil for delivery in August with the award announced next month. This comes after 200 million barrels were released last year.
Asian equity markets are mostly up this morning but gains are being trimmed after disappointing data from China (more below). As I type, the Nikkei (+0.90%) is leading gains in the region with the Hang Seng (+0.43%) and the KOSPI (+0.22%) also trading up. Elsewhere, stocks in mainland China are mixed with the CSI (-0.08%) just below flat while the Shanghai Composite is oscillating between gains and losses. S&P 500 futures are lower (-0.19%).
Coming back to China, industrial production for April rose by +5.6% y/y, falling much short of market expectations of a +10.9% increase and compared to a +3.9% rise in March after a muted start to the year. Additionally, retail sales advanced +18.4% y/y in April (v/s +21.9% expected), compared to a gain of +10.6% in the previous month. Meanwhile, fixed asset investments also fell short of expectations, rising by +4.7% y/y, against expectations of +5.5% and as against a +5.1% reading in March. This provides further evidence of the nation’s uneven recovery.
Elsewhere, the minutes from the Reserve Bank of Australia (RBA) indicated that the central bank still sees that further rate hikes “may be required”, depending upon how the nation’s economy and inflation evolve. Our economist thinks that overall the minutes make a June hike slightly less likely but that the comments on active QT are an interesting development. DB still favours one last hike in August. See more from our economist here.
Finally yesterday, the European Commission upgraded their forecasts for the Euro Area economy over this year and next. They now project 2023 growth at +1.1% (vs. +0.9% in Feb), and 2024 growth at +1.6% (vs. +1.5% in Feb). However, they did raise their inflation forecasts too, now seeing 2023 at +5.8% (vs. +5.6% in Feb) and 2024 at +2.8% (vs. +2.5% in Feb). Meanwhile on the data side, the US Empire State manufacturing survey for May fell by more than expected to -31.8 (vs. -3.9 expected). And Euro Area industrial production for March contracted by -4.8% (vs. -2.8% expected).
To the day ahead now, and data releases include US retail sales, industrial production and capacity utilisation for April, along with the NAHB housing market index for May. Elsewhere, we’ll get the German ZEW survey for May, Canadian CPI for April and UK unemployment for March. From central banks, we’ll hear from ECB President Lagarde and the ECB’s Makhlouf, along with the Fed’s Mester, Barr, Williams, Goolsbee, Logan and Bostic. Finally, today’s earnings releases include Home Depot.