


After breaking out to new 2023 highs, US equity futures are up small (on "debt talk progress" even though there has been zero actual debt talk progress) ahead of Powell’s speech today, trading in a narrow 10 points. As of 730am ET, S&P futures are up 0.2% to 4,220 while Nasdaq futures are up 0.1%. European stocks are up 0.8%m near session highs with Germany’s DAX set for a record close for the first time since January 2022 while the Nikkei 225 closed at a 33-year peak, as momentum carried over from Wall Street. Bond yields reversed earlier losses and hit session highs around 3.65% while dollars are weaker. Pre-market, megacap tech, where we just saw the biggest call buying since 2014, continues to drive higher amid yesterday’s rally. Commodities are mixed: oil is set to close its best week since mid-April while base metals are lagging. Macro calendar is quiet today with the major focus on Powell’s speech at a panel at 11am ET (Fed) where former chair Ben Bernanke will also be present. Keep an eye on the key 4200 level today.
In premarket trading, Applied Materials shares edged lower, down 1.7% trading, after the semiconductor-capital equipment company said sales will drop in the third quarter as the memory- chip slump weighs on its business. However, analysts noted that strength in its IoT, Communications, Automotive, Power and Sensors (ICAPS) business might offset some of the weakness in the memory segment. Here are some other notable premarket movers:
As discussed extensively in recent days, much of the recent optimism appears to be some unfounded hope that a debt ceiling deal will get done ahead of a market freakout just because algos believe the jawboning from politicians. In a call early Friday from Japan, President Joe Biden told his negotiating team that he’s confident Congress will act in time to avoid a default (he won't), according to a White House official. House Speaker Kevin McCarthy and Senate Majority Leader Chuck Schumer are making plans for votes in the coming days on a bipartisan deal (there won't be a deal).
"Growing optimism for a resolution to the debt ceiling negotiations has lifted sentiment, although the mood was slightly tempered by question marks over the Federal Reserve’s next move on interest rates,” said Richard Hunter, head of markets at Interactive Investor.
Meanwhile, treasuries recouped some losses from a selloff on mounting doubts the Federal Reserve will pause its credit tightening campaign next month.
European stocks rally for a second day with the German DAX on course for a record close as the mood around the US debt ceiling negotiations continues to improve. The Stoxx 600 is up 0.8%, its largest gain in two weeks, with financial services, miners and tech the strongest-performing sectors. Here are some of the most notable European movers:
Earlier in the session, Asian stocks were mostly higher following the tech-led gains on Wall Street, although Chinese markets lagged and were the outlier to Friday’s risk-on mood amid disappointment from Alibaba’s revenue miss. The Hang Seng Tech Index slumped as much as 2.4% as Alibaba Group Holding Ltd dropped in the wake of disappointing sales. India stocks snapped a three-day losing streak as banks and Adani Group stocks surged late in the session. The S&P BSE Sensex rose 0.5% to 61,729.68 in Mumbai, while the NSE Nifty 50 Index advanced 0.4% to 18,203.40. The MSCI Asia-Pacific index climbed 0.3% for the day. Adani Group stocks rallied led by flagship Adani Enterprises’ 3.5% surge after a Supreme Court-appointed panel in a report said it found no conclusive evidence to suggest a stock price manipulation in the group’s stocks. Infosys contributed the most to the Sensex’s gain, increasing 1.8%. Out of 30 shares in the Sensex index, 22 rose and 8 fell.
In FX, the Bloomberg Dollar Spot Index is down 0.2% having lost ground versus all its G-10 rivals. The New Zealand dollar is the best performer followed by the Norwegian krone.
In rates, treasuries initially rose for the first time this week with the US 10-year yield dropping 2bps to 3.62% before the entire move reversed and yields resumed their grind higher; the 10Y was last trading at 3.66% with bunds and gilts are little changed.
In commodities, crude futures advance with WTI rising 0.8% to trade near $72.40. Spot gold adds 0.4% to $1,965. Bitcoin gains 0.5%
Bitcoin is modestly firmer and despite eclipsing the USD 27k mark as the USD comes under Yuan-driven pressure this morning, BTC thus far has been unable to hold onto the level and is now holding just below it.
To the day ahead now, and the highlights will include remarks from Fed Chair Powell and ECB President Lagarde. Other central bank speakers include the Fed’s Williams and Bowman, the ECB’s Schnabel and De Cos, along with the BoE’s Haskel. Data releases include German PPI for April. Finally, G7 leaders are currently meeting in Japan.
Market Snapshot
Top Overnight News
A more detailed look at global markets courtesy of Newsquawk
APAC stocks were mostly higher following the tech-led gains on Wall St where the Nasdaq outperformed and the S&P 500 printed a 9-month high on debt ceiling optimism and firm data, although Chinese markets lagged amid disappointment from Alibaba’s revenue miss. ASX 200 was lifted with the tech sector front-running the gains as it took inspiration from its US counterpart and with the top-weighted financial industry trailing closely behind. Nikkei 225 surged at the open to print its highest since August 1990 although pared some of the gains after losing steam on its approach to the 31,000 level and as participants digested the latest CPI figures which were mostly in line with expectations but showed a faster pace of acceleration. Hang Seng and Shanghai Comp. were mixed with the Hong Kong benchmark pressured as tech giants suffered following Alibaba’s earnings which beat on the bottom line but missed on revenue, while frictions lingered after the US and Taiwan reached an initial agreement on a '21st Century' trade pact and with China concerned about recent signs of negative China-related developments at the G7.
Top Asian News
European bourses are in the green, Euro Stoxx 50 +0.8%, and are set to see the week out with upside of a similar magnitude. Thus far, fresh macro drivers have been limited the focus firmly on the Central Bank docket which features Lagarde & Schnabel from the ECB. Stateside, futures are flat/slightly firmer following as the debt ceiling sees tentative progress and participants switch their near-term focus to Fed speak/next week's data; firstly, Fed's Powell, Williams & Bowman are due today. Deere & Co (DE) Q1 2023 (USD): EPS 9.65 (exp. 8.59), Revenue 17.39bln (exp. 14.83bln). +2.5% in pre-market trade. Samsung Electronics (005930 KS) will not be swapping out default search engine on its smartphones from Google (GOOGL) to Microsoft's (MSFT) Bing, via WSJ citing sources.
Top European News
Geopolitics
Commodities
Fixed Income
FX
US Event Calendar
Central Bank Speakers
DB's Jim Reid concludes the overnight wrap
Earlier this week Henry and I published a chartbook entitled "A Time Capsule for the Future". It imagines how those in the distant future might look at what the macro signals were telling us now in May 2023. The presentation is here and yesterday we hosted a webinar with around 500 people on, the replay of which will go out this morning to this list. I’ll also add the link to my CoTD later.
Talking of 500 people, tomorrow that number will be at a social event my wife has organised at our kid’s school. We’re having a 3 movie outdoor cinema afternoon/early evening shindig. Fortunately the weather looks clear. Our house currently has more popcorn in it than your local multiplex. Infact as I type this at 5am I can smell it which is a bit off putting. So if you're running short in the weeks ahead you know where to come.
The movie of choice for markets in recent times has of course been the debt ceiling where events seem to be unfolding much quicker than anticipated. It was quite easy last week to suggest that the debt ceiling was having minimal negative impact on markets (outside of short-dated T-bills) but this week's more positive sentiment on the topic has moved bond markets a lot and sent the S&P 500 and Nasdaq to highest levels since late-August, indicating that maybe more risk was priced in than we thought.
The latest driver were comments from Republican Speaker McCarthy, who said “I can see now where a deal can come together”, and that the negotiators were in a “much better place”. Furthermore, he even said he expected the House to consider a deal next week, with an “agreement in principle” possible this weekend. There was some hesitation from Financial Services Chairman McHenry in the afternoon that injected a degree of volatility into markets, but given McCarthy’s tone he seems to think he has enough GOP votes even with some dissenters. Clearly we’ll have to see how this develops and the content of what’s actually agreed, but this is a world away from where we were a week-and-a-half ago, when the two sides came out of their initial meeting with no public progress at all, and the route to a deal was much harder to envisage.
The other big story yesterday was a significant bond selloff that was sparked by hawkish comments from Dallas Fed President Logan (voter). In particular, she said that “we haven’t yet made the progress we need to make” on inflation, and that “we aren’t there yet” in terms of it being appropriate to pause rate hikes. That caused a big reaction in markets, and led investors to dial up their expectations of another rate hike at the next meeting in June. Then later in the session, an FT interview with St Louis Fed President Bullard (non-voter) came out, who said that the situation “may warrant taking out some insurance by raising rates somewhat more to make sure that we really do get inflation under control”. On the more dovish side, Governor Jefferson (voter) said that “a year is not a long enough period for demand to feel the full effect of higher interest rates”. But the more hawkish comments got the attention, and by the close fed funds futures were pricing the chances of a June hike at 37.6%, having briefly gone as high as 41% on an intraday basis. So for the first time since SVB’s collapse, it’s clear that markets are now considering the prospect of a June hike as a serious possibility rather than just some tail risk.
In many respects, those two stories above are interlinked. After all, if we do get a resolution on the debt ceiling by early June, clearly that would make it easier for the Fed to proceed with a hike at their meeting on June 14. And with greater optimism on the debt ceiling and those hawkish remarks from Fed officials, US Treasuries sold off across the curve. For instance, the 10yr yield (+8.2bps) rose for a 5th consecutive session to a post-SVB high of 3.646%. Meanwhile, at the very front end, the pricing of further rate hikes meant that the 3m yield (+0.7bps) closed at a fresh post-2001 high of 5.225%. 2yr yields rose +9.8bps and are now +44bps above where they were intra-day last Thursday and +59bps above the lows from the prior Thursday, which was just after the last FOMC meeting .
US 1M Treasury yields (x-date sensitive) were down -4.7bps yesterday to 5.299%, that is their lowest closing level since May 5. The 1M yield is now down -23.2ps since its highest closing levels on Monday, having peaked intraday then at 5.577%, which is the all-time high for the security since they were first issued in late-2001. The spread of the 1M treasury yield remains 14bps higher than the 1M OIS overnight swap rate (which controls for the fed funds rate) after peaking at 44.5bps back on Monday as well, which is higher than we saw during the 2011 (5.3bps) or 2013 (23.8bps) debt ceiling episodes.
That risk-on tone from the perceived debt ceiling progress, and the moves to price in a June hike were given further support from various data releases. One was the weekly initial jobless claims from the US, which came in at 242k (vs. 251k expected) in the week ending May 13. On top of that, the Philadelphia Fed’s business outlook for May saw a noticeable rebound to -10.4 (vs. -20.0 expected), after coming in at its lowest of this cycle so far in April. So there was some encouragement for those hoping that a recession might be avoided. That said, there was also further evidence for the pessimists on offer, since the Conference Board’s Leading Index fell a further -0.6% in April, bringing its year-on-year decline to -8.0% now. And for what it’s worth, on the 6 previous occasions since 1960 when it had fallen by such a large amount, the economy was already in recession by that point.
For now at least, markets were focusing on the positives, which enabled equities to advance on both sides of the Atlantic. For instance, the S&P 500 (+0.94%) advanced for a second day, and to a nearly 9-month high, running with a particularly strong close that can be partially attributed to today’s option expiry. Cyclical and tech stocks powered the advance with the NASDAQ (+1.51%) continuing its outperformance, and for the first time this year it now has a YTD performance of +20% (+21.2%), which is one of the biggest of any major index (admittedly after a -33% decline in 2022). And if you just look at the 10 megacap tech stocks in the FANG+ index, the performance is even more notable, with the index up +3.45% yesterday to bring its YTD gains to +53.21%.
Asian equity markets continue to build on the global rally with the Nikkei (+1.04%) leading gains across the region, extending its winning streak to 7 consecutive day and maintaining its’ highest levels since 1990. Meanwhile, the KOSPI (+0.79%), the CSI (+0.21%) and the Shanghai Composite (+0.13%) are also trading up. Elsewhere, the Hang Seng (-1.01%) is bucking the regional trend this morning after weaker results from Alibaba. Outside of Asia, US stock futures are indicating a decent start with those tied to the S&P 500 (+0.18%) and NASDAQ 100 (+0.28%) printing mild gains.
Data from Japan showed that consumer price inflation accelerated to +3.5% y/y in April, matching market expectations against last month’s +3.2% increase. Additionally, core consumer inflation (+3.4% y/y) rose in-line with market expectations in April (v/s +3.2% in March) and stayed well above the central bank’s 2% target, thus renewing thoughts over if and when the Bank of Japan (BOJ) will make adjustments to their YCC policy.
Back in Europe, there was also growing optimism after natural gas prices closed beneath €30/MWh for the first time since June 2021, which has led to growing optimism about the economic picture as we head deeper into the year. That helped support risk assets across the continent, with the STOXX 600 up +0.39%, having also gotten a boost from the positive debt ceiling news as well. For sovereign bonds, the selloff was even bigger than the US though, with yields on 10yr bunds (+11.0bps), OATs (+11.9bps) and BTPs (+13.0bps) all seeing a significant increase.
Here in the UK, gilt yields actually hit some of their highest levels since Liz Truss was PM yesterday, after BoE Deputy Governor Ramsden said that they might accelerate their QT programme. He said that “There’s the potential for us to go up a little bit. I don’t see us going down given the experience of the first year.” However, Governor Bailey also said that “I do not envisage the balance sheet returning to what it was before the financial crisis”. Against that backdrop, yields on 10yr gilts were up +12.0bps to 3.957%, marking their highest level since late-October.
To the day ahead now, and the highlights will include remarks from Fed Chair Powell and ECB President Lagarde. Other central bank speakers include the Fed’s Williams and Bowman, the ECB’s Schnabel and De Cos, along with the BoE’s Haskel. Data releases include German PPI for April. Finally, G7 leaders are currently meeting in Japan.