US equity futures are trading in a narrow range, swinging between gains and losses as bonds climbed, clawing back some of Monday’s slump which sent yields to the highest since last November in the buildup to US CPI print tomorrow that is crucial to the Fed's decision when it will start to cut interest rates; Government debt in the UK and Germany followed suit, with yields falling across the curve after a 20-year UK bond sale drew record demand from investors. As of 8:00am, S&P futures were up 0.1% but traded tightly around the unchanged line as they extended Monday’s flat close on Wall Street, when trading was the thinnest since Christmas. Nasdaq futures gained 0.2% while Europe's Estoxx 50 was down about 0.5%, with technology and industrials leading to the downside. Commodity markets are higher lead by Energy and Metals, with Gold hitting a new record high, rising as much as $25 to $2,365 before paring gains. The macro picture is light today but keep an eye on the 3Y auction, which may give some cues to investor positioning ahead of the CPI.
In premarket trading, Mag7 names are mixed with Semis up. Blackberry rose 6.9% after the Canadian software company announced a robotics collaboration with AMD. Here are some other notable premarket movers:
Caution dominates sentiment before Wednesday’s inflation report, which is forecast to show some further easing of price pressures but may surprise to the upside after the recent surge in oil prices. Traders are also preparing for the ECB's rates announcement on Thursday, which could support bets on earlier easing by the ECB than the Fed, and for the start of the first-quarter earnings season. While markets now favor just two US rate cuts this year, former Fed St. Louis President James Bullard said three reductions remain “the base case."
For Mohit Kumar, strategist and chief economist for Europe at Jefferies, the more important discussion should be over how the Fed would respond to any signs that resilience in the American economy is faltering. "The right question is whether the Fed is willing to cut rates if there is any sign of weakness,” Kumar wrote in a note to clients. “And on that we are reasonably confident that if the economy weakens, we will see easing from the Fed which would support risk sentiment.”
While economists surveyed by Bloomberg expect the consumer price index will show some cooling in inflation, the core gauge, which excludes food and energy costs, is forecast to be up 3.7% from a year earlier — above the Fed’s 2% target. Concerns, however, are for hotter prints in the future, which reflect the ongoing surge in gold, which rose as much as $25 to $2,365 this morning, a new record high, and up more 17% since mid-February. Copper traded near a 15-month high as supply tightens and global manufacturing picks up.
Marija Veitmane, head of equity markets research at State Street Global, said her firm’s measure of online inflation pointed to a potentially above-consensus read. “We have seen prices in every sector we track to grow at higher than average pace in March,” she said. As for corporate results, “we continue to worry about narrowness of earnings, where majority of growth comes from the tech/large-cap stocks, which majority of companies are showing signs of stress,” Veitmane said. “Falling margins are particular concerns as they tend to precede layoffs.”
European stocks fall with consumer products, construction and real estate underperforming. FTSE 100 outperforms peers, adding 0.2%, DAX lags, dropping 0.6%. In individual stock moves Tuesday, BP Plc rose to a five-month high after an update that analysts said showed a strong performance in oil and gas trading. Renault SA advanced after an upgrade from analysts at Barclays Plc. Mining stocks were a bright spot in Europe as iron ore headed for its biggest two-day rally in more than two years.
Earlier in the session, Asian stocks climbed for a second day, as TSMC helped drive gains in tech shares on investor excitement over its US production plans. The MSCI Asia Pacific Index climbed 0.7%, with TSMC the biggest boost after the US announced an agreement for $11.6 billion in grants and loans to help the chipmaker build factories. Taiwan led gains across the region, with its benchmark index gaining as much as 1.9% to a record high. Stocks also advanced in Hong Kong, Japan and Australia.
In FX, the Bloomberg dollar spot index is flat, while NOK and SEK outperform, and JPY and DKK lag G-10 FX. The yen hovered near a 34-year low and around the closely watched 152 level that many say will trigger Japanese authorities to act.
In rates, treasuries rise, paring some of Monday’s losses that saw 10-year yields climb to the highest since November. Bunds, gilts follow suit as yields across the curve drop; treasuries are richer across the curve by at least 2bp, tracking bigger gains in core European rates. Treasury 10-year yields around 4.39% are down by more than 3bp on the day, but trail bunds and gilts in the sector by ~1.5bp as curve spreads remain within about 1bp of Monday’s closing levels. Gilt and bund futures remain near best levels of the day after UK 20-year bond sale drew record demand from investors. Asia session flows included two 2s10s block flatteners for a combined $650k/DV01 in cash risk. US session highlights include $58 billion 3-year note auction, first of three coupon sales this week. Coupon auction cycle begins at 1pm New York time with $58b 3-year note; $39b 10-year note and $22b 30-year bond reopenings follow Wednesday and Thursday. WI 3-year yield at roughly 4.565% is ~31bp cheaper than last month’s, which stopped 1.3bp through on strong demand.
In commodities, oil traded near a five-month high as investors weighed simmering tensions in the Middle East and persistent supply concerns. Israel said progress has been made in negotiations for a cease-fire in Gaza, signaling a potential easing of hostilities, but Hamas denied the claim. WTI traded within Monday’s range, adding 0.5% to trade around $86; meanwhile base metals are mixed; LME aluminum falls 0.5% while LME tin gains 2%. Spot gold held a record high, rising roughly $20 to trade near $2,359/oz, and up more 17% since mid-February. Copper traded near a 15-month high as supply tightens and global manufacturing picks up.
Looking at today's calendar, there is no US economic data or Fed speakers scheduled for the session
Market Snapshot
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A more detailed look at global markets courtesy of Newsquawk
APAC stocks traded mostly higher but with price action relatively rangebound with global markets lacking any major catalysts ahead of upcoming risk events. ASX 200 was led by miners but with gains capped after weak consumer sentiment and a mixed business survey. Nikkei 225 continued to benefit from recent currency weakness with USD/JPY lying in wait for a retest of 152.00. Hang Seng and Shanghai Comp. were varied with the Hong Kong benchmark lifted although the psychologically key 17,000 level continued to elude. Conversely, the mainland lagged after another tepid PBoC liquidity operation, while Premier Li recently noted uncertainty and complexity in the external environment are rising.
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European bourses in the red, Stoxx 600 -0.2%, action is subdued across the board but with some mild divergence in catalysts thin trade. DAX 40 -0.6% the relatively underperformer pressured by heavyweights SAP & Daimler Trucks and despite support in Infineon from TSMC; defence names, including Germany's Rheinmetall, pressured after commentary from GS on defence valuations and earlier geopolitical reports around necessary export licenses. Sectors more broadly do not have any overarching bias/theme, with relative outperformance in Basic Resources and Energy names echoing underlying benchmarks and helping the FTSE 100 +0.1% tread water. Stateside, futures near the unchanged mark (ES +0.1%, NQ +0.1%) with catalysts light thus far and the docket ahead sparse before Wednesday's CPI & Minutes; Tesla -0.3% in focus after a fatal crash lawsuit settled and given the latest CPCA numbers.
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Fixed Income
Commodities
Geopolitics: Middle East
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US Event Calendar
DB's Henry Allen concludes the overnight wrap
Markets got the week off to a subdued start yesterday, with little in the way of fresh developments to drive any new moves. That should change later in the week, as we’ll get the US CPI report, the ECB’s policy decision, and the start of the Q1 earnings season. But for now at least, the main theme has been the continuation of last week’s trends, including more and more doubts about rate cuts this year, and growing fears about inflation. Indeed, the US 5yr inflation swap (+1.0bps) hit 2.57% by yesterday’s close, marking its highest level since October.
Those questions about rate cuts have been clear from market pricing. For instance, the probability of a cut by the Fed’s June meeting was down to just 52% by the close yesterday, where it remains this morning. That’s the lowest since October, back when the 10yr Treasury yield was trading near 5% and there was growing belief in the “higher for longer” narrative when it came to rates. In addition, the total number of cuts priced for 2024 also fell, with just 61.5bps of cuts priced by the Fed’s December meeting, down -3.3bps on the previous day. And it’s clear that trend is happening globally as well, with overnight index swaps taking the chance of an ECB cut by June down from 97% to 91%, and this morning that’s fallen further to 88%. Moreover, the ECB cuts priced by December came down -4.8bps to 84bps, with a further decline overnight to just 80.5bps, which is the fewest so far this year.
With investors pricing in in fewer rate cuts, that’s helped to drive a bond selloff on both sides of the Atlantic. I n the US, it saw the 2yr Treasury yield rise +3.9bps to 4.79%, while the 10yr yield was up +1.8bps to 4.42%, the highest closing levels of 2024 so far for both. At one point intraday, the 10yr yield even moved as high as 4.46%, before coming back down again into the close. Both the 10yr real yield and 10yr breakeven reached year-to-date highs. And over in Europe, there was a similar bond selloff, with yields on 10yr bunds (+3.7bps), OATs (+1.7bps) and BTPs (+1.1bps) all moving higher.
Looking forward, the focus is now on tomorrow’s US CPI report for March, but yesterday’s Fedspeak offered little guidance on the timing of any rate cuts. Chicago Fed President Goolsbee, who’s a more dovish member, noted that if rates stayed high, then “the unemployment rate is going to start going up”. Separately, Minneapolis Fed President Kashkari said that the labour was still tight, although his base case was that inflation would continue to fall.
Earlier in the day, we also had the New York Fed’s latest Survey of Consumer Expectations, but it showed a mixed picture on inflation expectations. The good news was that 5yr expectations fell by three-tenths to +2.6%, but 1yr expectations were constant at +3.0%, and the 3yr measure ticked up again to a four-month high of +2.9%. So no obvious headline on the inflation side. But there were some more negative trends on the labour market, which showed consumers were becoming distinctly less confident. For example, the mean probability of losing one’s job rose to 15.7%, which is the highest it’s been in three-and-a-half years. And the mean probability of finding another job in the next three months if their current job was lost fell to 51.2%, the lowest in almost three years.
When it came to equities, there were signs that the volatility at the end of last week was beginning to subside, with the S&P 500 (-0.04%) seeing little change and the VIX coming down by -0.8pts. Small-cap stocks were an outperformer, with the Russell 2000 up +0.50%. Energy stocks underperformed within the S&P 500 (-0.63%), as oil prices saw a moderate retreat from five-month highs at the end of last week (Brent crude -0.87% to $90.38/bbl). The Magnificent 7 saw a slight outperformance (+0.27%) thanks to a +4.90% gain for Tesla following news late last week that it plans to unveil a robotaxi in August.
Over in Europe, the STOXX 600 (+0.47%) posted its strongest start to a week since February, whilst there were solid gains for the DAX (+0.79%) and the CAC 40 (+0.72%) as well. That strength was evident among other risk assets too, and yesterday saw US HY spreads (-5bps) and EUR HY spreads (-4bps) both tighten. Meanwhile, with the Q1 earnings season coming up, our colleagues in Credit Strategy have sketched their expectations for EUR IG. Although spreads have already tightened a lot since the autumn, they believe earnings should still prove supportive for spreads. See their full report here.
Overnight in Asia, the subdued tone has continued, and there’s been a mixed performance for equities across the region. That includes gains for the Nikkei (+0.86%) and the Hang Seng (+0.55%), alongside modest declines for the KOSPI (-0.12%), the Shanghai Comp (-0.15%) and the CSI 300 (-0.25%). In the meantime, there’ve been fresh losses for Japanese sovereign bonds, and the 2yr yield (+1.2bps) is up to 0.23% this morning, marking its highest level since 2011. That comes amidst comments from BoJ Governor Ueda overnight, who said that he expects Japan’s price trend to increase toward the end of the BoJ’s projection period. Looking forward, US equity futures remain broadly flat, with those on the S&P 500 up just +0.06%. And for US Treasuries there’s been a slight recovery this morning, with the 10yr yield down -1.0bps to 4.41%.
Finally, it’s a quiet day ahead on the calendar, but we will get the ECB’s Bank Lending Survey, and in the US there’s the NFIB’s small business optimism index for March.