US futures edged higher after the House passed a deal to avert a US default (with more Democrats voting for the "McCarthy" deal than Republicans) and Fed officials hinted at a pause in interest-rate hikes. Globally, the Caixin China PMIs beat expectations (not to be confused with the catastrophic official PMI print) and Euro Area CPI printed dovishly, aiding a global risk-on tone. As of 7:45am ET, S&P 500 futures added 0.2% and were again trading right around 4,200 ironclad resistance, while Nasdaq 100 contracts were 0.1% higher. The Dollar slumped to a three day low as the euro rallied after data showed underlying inflation in the euro zone dipped by more than expected in May, though that may not stop the European Central Bank from raising rates. Treasury yields edged higher, mirroring moves in Europe and the UK. Gold and Bitcoin fell, while oil climbed for the first time in three days. Today’s macro data focus includes ADP, Jobless Claims, ISM-Mfg, and Construction Spending. As the market moves past the debt ceiling, the focus shifts to the Fed and the macro narrative.
In premarket trading, a rally in companies exposed to the development of artificial intelligence-related products continued to cool in US premarket trading. Software maker C3.ai Inc. plunged as much as 22% after a disappointing sales outlook. Nvidia, whose meteoric rise had fueled the rally, was steady after losing some ground on Wednesday. Among other individual movers, Salesforce Inc. slumped abut 6% after it gave a lackluster outlook for future sales. Advance Auto Parts Inc. extended a decline after cutting earnings and sales guidance. Here are some other notable premarket movers:
Passage of the debt-ceiling deal struck by House Speaker Kevin McCarthy and President Joe Biden means the bill will be sent to the Senate where it will be promptly signed well before the June 5 default deadline. The signs of optimism were helped along by comments from Fed officials who backed the possibility of holding rates unchanged the next meeting, and some encouraging economic data out of China.
“Finally, some good news is driving today’s optimism,” said Ludovica Scotto di Perta, a structured-product specialist at Swissquote Bank SA. “US raising the debt ceiling and sentiment that the Fed will pause are boosting risk appetite. It might only be temporary but we will take anything at this point.”
“A June swoon may be in the cards as the S&P 500 struggles to clear key resistance at 4,200,” said Adam Turnquist, chief technical strategist at LPL Financial. “While a deal in Washington could be a catalyst for a breakout, overbought conditions in the technology sector and mega-cap space — the primary drivers of this year’s market advance — could make this a high hurdle for the market to clear on a near-term basis, especially without broader participation.”
Meanwhile, hopes for a Fed pause were partly pared back after Wednesday’s JOLTS jobs report for April showed more than 10 million openings, the highest in three months and above consensus estimates. But Fed Governor Philip Jefferson said the central bank is inclined to keep interest rates steady in June to assess the economic outlook. His remarks were echoed by Philadelphia Fed President Patrick Harker, who said, “I think we can take a bit of a skip for a meeting.”
Attention turns next to US jobless claims data due later Thursday, before Friday’s nonfarm payrolls.
European stocks rose amid a wider risk-on sentiment after the House passed debt limit deal, and were on course to snap a three-day losing streak after US lawmakers took a step closer to averting a default. The Stoxx 600 is up 0.7% with media, banks and carmakers among the leading performers as data showed euro-area inflation slowed more than analysts’ estimates in May. Adnoc Logistics & Services, the maritime logistics unit of Abu Dhabi’s main energy company, soared as much as 52% on its debut after a hugely oversubscribed initial public offering. Airbus SE gained after Reuters reported a rise in aircraft deliveries. Here are the most notable European movers:
Earlier in the session, most Asian benchmarks rose, though gains in Chinese stocks faded as investors studied mixed readings on the country’s manufacturing activity. Caixin manufacturing data for May showed an expansion, exceeding forecasts for a small contraction. The numbers followed official figures Wednesday that showed a further contraction in activity.
In FX, the Bloomberg Dollar Spot Index is flat while the Swiss franc has outperformed its G-10 peers slightly. The Norwegian krone is the worst performer, falling 0.8% versus the greenback. Crude futures decline with WTI falling 0.3% to trade near $67.90. Spot gold falls 0.2% to around $1,958. Bitcoin drops 0.7%. The euro rallied against the dollar after data showed underlying inflation in the euro zone dipped by more than expected in May, though that may not stop the European Central Bank from raising rates. European Central Bank Governing Council member Olli Rehn said the bank won’t contemplate lowering borrowing costs before core consumer-price growth slows in a continuous manner.
In rates, treasuries are lower with US 10-year yields rising 3bps, while two-year borrowing costs climb 4bps as stock futures partly bounce from Wednesday’s drop. 2s10s, 5s30s spreads are flatter by 1bp and 1.8bp on the day while 10-year yields are around 3.67%, cheaper by 2.5bp and lagging bunds and gilts by 0.5bp and 1.5bp in the sector. Bunds and gilts are also in the red with the former showing little reaction to data showing a larger than expected slowdown in euro-area inflation. US session focus turns to data, including ADP employment, jobless claims and ISM manufacturing. Fed’s Harker also due to speak after urging a June pause Wednesday.
In commodities, WTI futures lower by 0.75% on the day. Industrial metals climbed from six-month lows, led by copper and nickel. China’s sluggish economy has been a key driver of weakness demand for raw materials.
Bitcoin is softer on the session, though only incrementally so, and remains in close proximity to the USD 27k mark which itself is towards the mid-point of sub-1k parameters.
To the day ahead now, and the data highlights include the flash CPI release from the Euro Area for May, as well as the unemployment rate for April. Otherwise in the US, there’s the ISM manufacturing release for May, the ADP’s report of private payrolls for May, and the weekly initial jobless claims. In addition, there’s the global manufacturing PMIs for May, along with April data on German retail sales and UK mortgage approvals. From central banks, we’ll hear from ECB President Lagarde, the ECB’s Knot and Villeroy, as well as the Fed’s Harker. The ECB will also be releasing the account of their May meeting.
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A more detailed look at global markets courtesy of Newsquawk
Asia-Pac stocks were mostly positive after the US House passed the debt ceiling bill to avert a default which now moves to the Senate and with sentiment helped by the surprise expansion in Chinese Caixin Manufacturing PMI. ASX 200 was choppy in early trade but ultimately gained after stronger-than-expected capital expenditure and the improvement in Chinese Caixin PMI. Nikkei 225 was marginally supported by data releases including business capex which grew at its fastest pace since Q3 2016 and with Japanese firms logging their largest recurring profits for Q1. Hang Seng and Shanghai Comp. shrugged off the early indecision and were boosted after the Chinese Caixin Manufacturing PMI data partially atoned for yesterday’s weak official PMI readings.
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European bourses are firmer across the board, Euro Stoxx 50 +1.0%, as sentiment continues to improve after the US House vote and strong Chinese Caixin PMI. Note, limited sustained reaction was seen following the EZ Flash PMIs given they very much chime with the skew from the regional metrics released in recent sessions. Sectors are predominantly firmer with Energy outperforming after recent marked pressure while Real Estate names lag across the region. Stateside, futures are essentially flat as we await the debt ceiling's progression into the Senate and particularly the prospect of amendments sending it back to the House, ES +0.2%. Nvidia (NVDA) CEO is to meet TSMC (2330 TT/TSM) and Foxconn (2354 TT) executives on Friday; adds that TSMC has immense capacity and incredible agility.
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DB's Jim Reid concludes the overnight wrap
Welcome to June and another day I feel blessed that I have a job as half term sees the family going to a heaving Harry Potter World today. I’ve tried to read the first book three times and the movies several times more. I don’t see what all the fuss is about. My wife and the three kids on the other hand are obsessed. So it’s a good division of time today. Back here in Muggle Land, since it’s the start of the month, we’ll shortly be releasing our monthly performance review of how different assets fared in May. Overall it was an eventful time, starting off with the closure of First Republic Bank and renewed concerns about financial turmoil. We then had another set of rate hikes from the Fed and ECB, negotiations around the US debt ceiling, serious excitement about AI, along with some increasingly downbeat data releases outside the US. With all said and done, that left most assets negative for the month, with losses across equities, bonds and commodities, despite a few key outperformers like tech stocks. See the full review in your inboxes shortly.
The main news last night came from the House of Representatives, which voted 314-117 in favour of sending the debt ceiling bill over to the Senate. The bill as currently written would suspend the debt ceiling until January 1 2025, with federal spending capped until 2025. In terms of timing for the Senate vote, Senator Thune noted that the deal could pass the upper chamber by Friday night. The Congressional Budget Office estimates that spending will have to reduce $64 billion in the next budget, as both parties still have to negotiate a separate spending package by the end of September.
That vote in the House took place after US markets had closed, as a downbeat risk session helped the S&P 500 shed -0.61%. Those losses were driven by several factors, but the biggest was a succession of data releases that all raised fears of an upcoming recession. For instance in the US, the MNI Chicago PMI for May came in beneath every economists’ expectation at 40.4 (vs. 47.3 expected), and that followed on the heels of the weaker-than-expected China PMIs earlier. As we'll see later the Caixin PMI this morning actually unexpectedly rose so a complicated picture is emerging.
The complications were present yesterday as well as the JOLTS job openings report for April, contained more bad news from the Fed’s perspective. The main headline was a big increase in job openings, which unexpectedly rose to a three-month high of 10.103m (vs. 9.4m expected), and the previous month’s openings were revised up as well. In turn, this meant that the ratio of vacancies per unemployed people went back up to 1.79, having been at a 16-month low the month before. So that’s further evidence that the US labour market remains very tight by historic standards.
The release meant that investors initially dialled up the chances of another rate hike from the Fed in two weeks, with fed futures pricing in a 70% chance of a hike shortly after the JOLTS release. However comments from policy voters Philadelphia Fed President Harker and Fed Governor Jefferson – who recently was nominated to be Fed vice chair – caused investors to cut their bets for a rate hike this month down to a 33% chance from 59% the day before. That is the lowest chances since May 25. Governor Jefferson noted that, “skipping a rate hike at a coming meeting would allow the Committee to see more data before making decisions about the extent of additional policy firming.” President Harker noted that he was “definitely in the camp of thinking about skipping any increase at this meeting,” before adding that “If we’re going to go into a period where we need to do more tightening, we can do that every other meeting.” Investors still expect another rate hike this cycle as fed futures are pricing in a 83% chance of a rate hike through the July meeting, but after the comments yesterday it is clear that there is more weight on July over June. Treasuries rallied with 10yr yields down -4.4bps, as investors focused on the more negative longer-term outlook, which was seen as raising the likelihood of rate cuts further out. This morning in Asia 10yr yields (+2.29 bps) have reversed around half of yesterday's gains, trading at 3.67% as we go to print.
Outside of the Fed-speak yesterday there was also the release of the Fed’s Beige book which indicated that while the economy was indeed slowing as hiring and inflation eased, there was still signs that the economy remained too hot. The Fed’s report said that while employment increased in most districts, it was “at a slower pace than in previous reports.” Similarly, the report noted “prices rose moderately over the reporting period, though the rate of increase slowed in many districts.” The Fed’s report also pointed to growing divides as “high inflation and the end of Covid-19 benefits continued to stress the budgets of low- and moderate-income households, driving increased demand for social services, including food and housing”. All together the report based on anecdotal data from the 12 regional banks seems in-line with the broader economic data that shows while the economy is slowing at the margins, inflation appears to be settling above the Fed’s target with core services inflation the root cause.
Overall sentiment landed on the negative side with equities and other risk assets like HY credit and oil struggling. For instance, the S&P 500 (-0.61%) posted its biggest decline in a week as the more cyclical sectors led the decline and defensives like telecoms (+1.5%), utilities (+1.0%), and healthcare (+0.9%) rallied. Over in Europe, the losses were more severe and the STOXX 600 (-1.07%) closed at a 2-month low, with others including the DAX (-1.54%) and the FTSE MIB (-1.97%) losing significant ground as well. Even tech stocks (one of the few to post gains in May) pared back some of their recent advance, with the NASDAQ (-0.63%), FANG+ (-0.92%), and the Philadelphia Semiconductor (-2.71%) indices all lower. Even Nvidia fell -5.7%, it's biggest fall since January 30th.
Whilst European equities were a significant underperformer, there was a major rally among their sovereign bonds after the German and French CPI prints came in beneath expectations. In Germany, CPI fell to +6.3% in May using the EU-harmonised measure (vs. +6.7% expected), which was the lowest since February 2022. And in France, it fell to +6.0% (vs. +6.4% expected), which was the lowest since May 2022. That raised hopes for the Euro Area-wide print that’s out today, and yields on 10yr bunds (-6.0bps), OATs (-5.8bps) and BTPs (-7.0bps) all moved lower on the day. The only exception to this inflation pattern was in Italy, where CPI only fell back to +8.1% (vs. +7.5% expected).
With those inflation prints in hand, investors moved to slightly dial back the amount of rate hikes expected over the coming months. Significantly, overnight index swaps are now pricing in slightly fewer than 50bps more hikes, suggesting at least some doubt about whether the ECB will go on to deliver a move beyond the one that’s widely anticipated in two weeks from now. In the meantime, there were also some fresh tailwinds on inflation from commodity prices, with Brent crude oil (-1.20%) losing further ground to close at $72.66/bbl.
Asian equity markets are broadly trading higher this morning after the debt ceiling bill was cleared in the US House of Representatives and on better China data (see below). Risk appetite across the region has solidified with the Hang Seng (+1.02%) leading gains and rebounding from near a six-month low on expectations of a Chinese stimulus to revive growth. Stocks in mainland China are also trading in the green with the CSI (+0.64%) and the Shanghai Composite (+0.37%) nudging higher. Elsewhere, the Nikkei (+0.29%) held on to its gains while the KOSPI (-0.22%) is slightly down so far in the session. In overnight trading, US equity futures are fluctuating with those on the S&P 500 (+0.04%) just above flat while those tied to the NASDAQ 100 (-0.15%) are inching lower.
Early morning data showed that China’s factory activity bounced back to expansionary territory in May as the latest Caixin manufacturing PMI rose to 50.9 in May from 49.5 in April, contradicting the official PMI data yesterday that showed further deterioration in factory activity for May. Separately in Japan, factory activity expanded for the first time since October 2022 after the final estimate of the au Jibun Bank manufacturing PMI stood at 50.6 in May from the prior month’s reading of 49.5.
Wrapping up the data over the last 24 hours and another release yesterday came from Germany, where unemployment rose by +9k in May (vs. +13.5k expected). That left the unemployment rate at 5.6% as expected. Elsewhere, Italy’s economy grew by more than expected in Q1, with the latest estimate revised up a tenth from the initial reading to +0.6%.
To the day ahead now, and the data highlights include the flash CPI release from the Euro Area for May, as well as the unemployment rate for April. Otherwise in the US, there’s the ISM manufacturing release for May, the ADP’s report of private payrolls for May, and the weekly initial jobless claims. In addition, there’s the global manufacturing PMIs for May, along with April data on German retail sales and UK mortgage approvals. From central banks, we’ll hear from ECB President Lagarde, the ECB’s Knot and Villeroy, as well as the Fed’s Harker. The ECB will also be releasing the account of their May meeting.