US equity futures are flat, trading around 5,252, having rebounded from session lows even as 10Y yields extend their ascent and the USD strengthens as traders further pare expectations for interest-rate cuts in the face of resilient readings on the US economy. As of 8:00am, S&P and Nasdaq fuitures are both unchnaged while major European markets are mostly higher with only Spain/UK in the red. Treasury yields rose to their highest levels of the year across the curve, with the 10-year climbing above 4.45%. Interest-rate swaps imply around 60 basis points of US monetary easing this year, making two cuts the most likely outcome. On Friday, the chance of a third cut was still above 50%. European bond yields are also higher, but yield curves are not moving in tandem. Commodities are mixed with Energy lower, Metals higher, and Ags mixed. Crude oil turned lower after last week’s strong gains after Israel said it will pull some troops from Gaza. Brent futures briefly dropped below $90-handle before reversing losses. Gold also reversed early losses and printed a fresh record above $2,350 before paring gains. Looking at the calendar, Mon/Tues are light macro days ahead of Wednesday's CPI print, Thurs’ ECB mtg, and Fri’s Bank earnings which launch Q1 earnings season; we algo get at least 7x Fedspeakers where investors will see if a hawkish pivot is building if CPI prints hotter than expected. While the market is trimming rate hike estimates both Goldman and JPM still see at least 3x rate cuts.
In premarket trading, gigacap tech names are mixed with TSLA, NVDA, NFLX all higher. Tesla rallied as much as 4.2%, set to trim some of its 34% year-to-date slump, after Elon Musk said the carmarket would unveil its new robotaxi on Aug. 8. Amazon.com was on course to open above its all-time closing high for the first time in almost three years. Shares in cryptocurrency-linked companies rose as Bitcoin climbed back over the $72,000 mark as it advanced for a third session. Here are some other premarket movers:
Among the main overnight news, the US plans to award chipmaker Taiwan Semiconductor Manufacturing $11.6 billion in US grants and loans to build three factories in Arizona, as part of an effort to boost domestic production of critical technology. Meanwhile, Treasury Secretary Janet Yellen wrapped up four days of talks in China with a warning to Beijing’s banks and exporters about the risk of sanctions for providing support for Russia’s war.
For investors, it’s a busy week that includes US inflation data, a European Central Bank rate decision and the start of first-quarter earnings. Last Friday’s US jobs numbers exceeded expectations for a fifth straight month, reinforcing the Fed’s view of being patient about reducing rates. The next key moment for markets is Wednesday’s US consumer-price figures, projected to show further evidence of gradual cooling, although there are risks that the surge in oil prices pushes headline inflation higher than expected.
"There are indeed risks, and seeing the 10-year Treasury yield sustainably surpass 5% would indicate markets pricing in more likelihood of a hike,” Madison Faller, global investment strategist at JPMorgan Private Bank, said on Bloomberg Television. “However, as long as investors perceive a rate cut as the next move, they should be able to navigate this transition."
European stocks gained, lifting the Estoxx 50 up ~0.5% with miners, autos and energy outperform in Europe after a rebound in copper and iron ore prices; the regional Stoxx 600 Index advanced 0.3%. Here are the most notable European movers:
Earlier in the session, Asian stocks tracked US peers higher, as strong jobs data in the world’s biggest economy helped lift sentiment on the global outlook. The MSCI Asia Pacific Index rose as much as 0.7%, paring last week’s loss, with TSMC and Toyota among the biggest contributors. Japan, India and Taiwan led gains around the region, after better-than-expected US payrolls data showed the economy remains resilient in the face of high interest rates. On the other end, mainland China stocks fell, reopening after holidays, and Hong Kong gauges were mixed. While strong holiday spending data was seen as encouraging, investors also weighed signs of risk elsewhere in the economy. A Chinese state bank called for the liquidation of defaulted developer Shimao Group. Still, the “winding-up” petition against Shimao and other negatives such as US Treasury Secretary Janet Yellen’s comments on Chinese overcapacity “should be digested by the market soon and not have much material impact on sentiment,” said Shen Meng, a director at Chanson & Co. in Beijing.
In FX, the Bloomberg Dollar Spot Index rose 0.1% with SEK and NOK are the strongest performers in G-10 FX, CHF and JPY underperform. “Upside momentum is struggling to form even as another robust payrolls emphatically showcases the no landing narrative on the economy and USD yield support approaches 6-month highs,” Richard Franulovich, head of foreign-exchange strategy at Westpac Banking Corp. wrote in a note. “A likely 0.3% core CPI this week and a set of FOMC minutes that likely sound more hawkish than Powell’s benign press conference should nonetheless keep USD upside potential intact”
In rates, treasury yields gained across the curve after yields gapped higher at the open, following no major escalation to the Israel-Hamas war and reports of Gaza cease-fire talks, which also weighed on oil prices. Yields rose to session highs, cheaper by 2bp-5bp across the curve with intermediates lagging, widening 2s10s spread by nearly 2bp on the day; 10-year TSY yield peaked over 4.45%, highest since November, outperforming bunds by around 1bp in the sector. Front-end yields joined rest of curve at YTD highs as Fed-OIS contracts price in less cumulative easing this year; the yield on two-year Treasuries advanced three basis points to 4.78% as Friday’s US employment report, when taken with the pickup in key inflation numbers at the start of 2024, raises the possibility of later or fewer interest rate cuts by the Federal Reserve this year. Pricing for a full 25 basis-point rate cut has been pushed out to September from July, with the market now expecting two cuts for the rest of the year, down from the three rate cuts forecast by the market. The next coupon auction cycle begins Tuesday with $58b 3-year note; $39b 10-year note and $22b 30-year bond reopenings follow Wednesday and Thursday.
In commodities, oil retreated from a five-month high after Israel said it would remove some troops from Gaza. Crude has rallied recently on escalating geopolitical tensions and supply shocks, raising the prospect of prices for global benchmark Brent reaching triple figures and muddying the outlook for inflation. Spot gold rises roughly $6 to trade near $2,336/oz, having trimmed some of earlier gains that saw it set a fresh record. Spot silver gains 1.2% near $28. Spot gold rises roughly $6 to trade near $2,336/oz. Spot silver gains 1.2% near $28.
“Currently, we foresee the conflict continuing without significant spillover in the next few months, but the risk remains significant, and we’re closely monitoring the situation,” Lizzy Galbraith, political economist at Abdrn Plc, said on Bloomberg TV.
Bitcoin continues to rise, surpassing the $72k mark and on pace to rise above the mid-March record highs.
Looking at today's calendar, US economic data slate includes March NY Fed 1-year inflation expectations (11am). The Fed speaker slate includes Goolsbee (1pm) and Kashkari (7pm); Bowman, Williams, Collins, Bostic and Daly are slated later this week, with March FOMC meeting minutes to be released Wednesday.
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A more detailed look at global markets courtesy of Newsquawk
APAC stocks were ultimately mixed as markets digested Friday's strong NFP report and US-China talks. ASX 200 eked mild gains amid strength in mining and tech, while there were some M&A-related headlines. Nikkei 225 outperformed with the help of recent currency weakness, while wage data matched estimates. Hang Seng and Shanghai Comp. swung between gains and losses with an early boost in Hong Kong after mainland markets and Stock Connect trade reopened from a 4-day weekend and with some encouragement from Yellen's meetings in China. However, stocks failed to sustain the early optimism with sentiment clouded by developer concerns after a winding-up petition was filed against Shimao Group.
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European bourses are mostly firmer after a contained open, Stoxx 600 +0.2%, upside which occurred despite a lack of fresh fundamental drivers and amid ongoing hawkish fixed income action; DAX 40 +0.5% the outperformer given its Auto exposure and after strong German Industrial Output data. Sectors have a slight anti-defensive bias with Media, Food/Beverage and Healthcare names in the red while Basic Resources and Autos outperform on the return of China. Stateside, futures are near the unchanged mark, ES -0.1%, with specifics light as participants look to the NY Fed SCE later before Wednesday's CPI and FOMC Minutes for further insight into the Fed's calculus amid recent hawkish price action.
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Geopolitics: Middle East
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US Event Calendar
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DB's Jim Reid concludes the overnight wrap
Markets had a rough start to Q2 last week, with the S&P 500 (-0.95%) posting its worst weekly performance in 3 months, whilst the US 30yr yield (+21.0bps) saw its biggest weekly rise since October. Several factors were driving the selloff, but geopolitical tensions played a key role, as fears mounted about some sort of escalation in the Middle East. That meant Brent crude oil prices rose for a 4th consecutive week, surpassing $90/bbl for the first time since October. And in turn, that’s led to growing concern about inflation, with investors continuing to price out the chance of rate cuts from the Fed. Indeed, as of this morning, just 62bps of rate cuts are priced in by the December meeting, which is a long way from the 158bps expected at the start of the year.
Those questions about rate cuts gathered pace on Friday, as the US jobs report showed nonfarm payrolls grew by +303k in March (vs. +214k expected). And unlike the previous month, the upside surprise didn’t come with sharp downward revisions. In fact, the January and February prints were revised up by a total of +22k. So even though futures are still pricing a rate cut by June as the most likely outcome, it was down to just a 54% chance by the close on Friday. That also meant that Treasury yields have reached new highs for the year, with the 10yr yield ending last week at 4.40%, and the 10yr real yield rising to 2.03%. And this morning they’ve continued to rise, with the 10yr yield up another +2.0bps to 4.42%.
Looking forward, that question on the timing of rate cuts will be on the agenda this week, as the US CPI release for March is out on Wednesday. So far this year, core CPI has proven stronger than expected, with the January and February prints both at a monthly +0.4%. But for now at least, the Fed hasn’t been too alarmed, and Chair Powell said last week that “ it is too soon to say whether the recent readings represent more than just a bump.” So this week’s releases will be in focus, as a third month of stronger inflation would make it harder to dismiss as a temporary move higher.
In terms of what to expect, our US economists think that monthly headline CPI will be at +0.27%, which would see the year-on-year measure pick up two-tenths to +3.4%. But for core CPI, they see the monthly number slowing down to +0.24%, which would push the year-on-year measure down a tenth to +3.7%. In the meantime, it’s clear that markets are becoming more concerned about the issue, and last week saw the US 2yr inflation swap close at its highest since October, at 2.54%. For more on this week’s CPI report, see the full preview from our economists here, along with how to sign up for their webinar.
Over in Europe, the main event this week is likely to be the ECB’s policy decision on Thursday. It’s widely expected they’ll leave rates unchanged at this meeting, including by market pricing and the consensus of economists. So the big question is likely to be what they signal about the subsequent meeting in June, which investors are pricing in as a very strong probability for an initial rate cut. Indeed, we found out last week that Euro Area core inflation fell to a two-year low in March of +2.9%, and the account of the last ECB meeting said that “the case for considering rate cuts was strengthening.” In their preview (link here), our European economists think that the ECB needs additional data over the next couple of months to underpin its confidence in price stability and open the door for a June rate cut. But they think it should be clear that a June cut is the working assumption, barring a significant shock.
This week ahead also marks the start of the Q1 earnings season, with several US financials reporting on Friday, before the number of releases starts to pick up over the subsequent couple of weeks. Friday’s reports include JPMorgan, Citigroup, Wells Fargo and BlackRock, and DB’s asset allocation team has released a preview of the Q1 earnings season here.
Rounding up the week ahead, there are monetary policy decisions from both the Bank of Canada and the Reserve Bank of New Zealand on Wednesday, along with the Bank of Korea on Friday. Separately on Wednesday, there’s the release of the FOMC minutes from the March meeting. And on Friday, the Bank of England will publish the Bernanke Review into its forecasts. When it comes to data, we’ll also get China’s CPI and PPI reading for March on Thursday, and on Friday’s there’s the UK’s monthly GDP reading for February.
As the week begins, the main story so far has been the fall in oil prices overnight, with Brent crude down -1.54% from its Friday close to $89.77/bbl. That’s partly because last week’s fears of an escalation in the Middle East didn’t materialise over the weekend, although oil prices still remain above their levels throughout the entirety of Q1. Otherwise, there’s been a subdued start for equities, with the Hang Seng (-0.09%), the CSI 300 (-0.44%) and the Shanghai Comp (-0.17%) all losing ground, and futures on the S&P 500 are down -0.10% as well. However, there have been gains elsewhere, including for the Nikkei (+0.79%) and the KOSPI (+0.31%).
Recapping last week in more detail, that strong jobs report was the main news on Friday, with the headline payrolls number firmly surpassing expectations with a +303k gain (vs +214k expected). That was accompanied by an increase in average weekly hours to 34.4 (vs 34.3 expected), whilst average hourly earnings (+0.3%) and the unemployment rate (down a tenth to 3.8%) came in as expected. Altogether, the report added to the view of the Fed being under little urgency to reduce rates, raising the bar for a June cut. Indeed, Friday saw fed funds futures reduce the pricing for a cut by June from 74% to 54%, with a first 25bps cut now only fully priced by the September meeting. By contrast, ECB pricing saw little change, with overnight index swaps pricing 89bps of cuts by December.
Concerns about persistent inflation were further cemented by the jump in oil prices, which has occurred amidst rising tensions in the Middle East. That saw Brent crude and WTI rose +4.22% and +4.50% respectively, reaching $91.17/bbl and $86.91/bbl respectively (+0.57% and +0.37 on Friday). Inflation concerns also meant that Treasury yields reached their highest levels since November across the curve. At the front end, 2yr yields jumped by +10.4bps on Friday to 4.75% (+13.1bps over the week), whilst 10yr yields rose +9.4bps to 4.40% (+20.3bps over the week). The bond sell off was more moderate in Europe however, with 10yr bund yields rising +10.0bps over the week (and +3.7bps on Friday).
But even as there was a fresh selloff in fixed income, US equities saw a strong recovery on Friday, with the S&P 500 and the NASDAQ up +1.11% and +1.24% respectively. Nevertheless, the Friday rally was insufficient to reverse losses earlier in the week that followed on from rising geopolitical tensions and hawkish Fedspeak, as the S&P 500 fell -0.95% over the week. In the meantime, the Russell 2000 saw a larger underperformance of -2.87% for the week, whilst the Magnificent 7 gained +0.53%. This volatility sent the VIX up +3.0 points to its highest weekly close since October (despite a -0.3pt decline on Friday). On the other hand, European equities did not participate in Friday’s rally, with the STOXX 600 down -1.19% on the week, and -0.84% on Friday.
Finally in commodities, gold saw another +4.48% gain last week (and +1.87% on Friday) to $2,330/oz, hitting another all-time high.