Futures are mixed with small-caps leading as calm returned to markets after traders focused on the positive implications from a French election where the far-left ended up winning and contemplated unleashing a flood of spending. European stocks rose and the euro pared earlier losses. At 8:00am S&P 500 futures were fractionally in the green, erasing an earlier loss, and following the biggest weekly advance for the index since April; the Nasdaq was in the green as has been the case pretty much every single day this year. US Treasuries started off the week on the backfoot, as traders braced for Federal Reserve Chair Jerome Powell’s congressional testimony and US inflation data this week: bond yields are +2-3bps and 10Y yield trade around 4:31%. The USD is flat following its worst week since early March. Commodities begin the week under pressure with weakness across all three complexes. Today’s macro data focus is on NY Fed’s 1-year inflation expectations, but the impactful data comes from CPI/PPI on Thurs/Fri and the ten Fedspeakers this week. We may see US markets chop sideways into CPI and the kick off of earnings season later this week, though we are still in a period of positive seasonality
Pre-mkt, semis are higher ex-NVDA with the balance of Mag6 names in the green. In other corporate news, Boeing agreed to plead guilty to criminal conspiracy to defraud the US after the Justice Department concluded the planemaker failed to adhere to an earlier settlement stemming from two crashes of its 737 Max jetliner. Here are the most notable premarket movers:
Over the weekend, in a stunning reversal a left-wing coalition of far-left parties received the most votes in French legislative elections on the weekend, but failed to secure enough seats to form a government. That outcome limits how much any party can do, leading to bets that President Emmanuel Macron will form a new coalition between the center and center-left. In the runup to the vote, investors had been concerned about the prospect of a Le Pen takeover after Macron’s crushing defeat in last month’s European parliamentary elections.
“A hung parliament is not necessarily a bad outcome because it means that the most extreme policies are less likely to make it to the legislature,” said Azad Zangana, a senior European economist at Schroders. “It’s still a very uncertain period going forward.”
Meanwhile, the political situation in the US is even more ridiculous as Joe Biden’s continues to salvage his embattled reelection bid, fending off calls from Democratic lawmakers to step aside, although the chorus of voices against the dementia-addled president is too big and it is only a matter of time before Joe is forced to step down.
Turning to the calendar, Powell’s testimony on Tuesday and Wednesday will be closely watched ahead of Thursday’s consumer price figures for June. The Fed Chair is likely to say policymakers need further confirmation they have vanquished inflation before they’re ready to cut interest rates when he speaks to Congress. And yes, earnings season begins again: this Friday we get Q2 reports from major US banks including JPMorgan.
European stocks started off in the red but quickly traded higher as the narrative once again reversed itself and the Stoxx 600 was up 0.4%. French stocks rise while the yield spread with Germany narrows slightly as the worst-case scenarios in the French election have been avoided, although investors expect uncertainty to persist as political gridlock looms. The CAC 40 is up 0.5% after swiftly reversing an opening decline. The spread between French and German 10-year yields falls 1bps to 65bps.
Earlier, Asian stocks declined as a slump in Chinese equities extended ahead of a key policy meeting, weighing on the broader region. The MSCI Asia Pacific Index swung to a loss of as much as 0.3% after gaining 0.4% earlier. Industrial and Commercial Bank of China and Bank of China were among the biggest drags. TSMC, which has the highest weighting on the regional benchmark, jumped 3% to a record high after Morgan Stanley raised its price target. A selloff in equities in mainland China and Hong Kong deepened, with the Hang Seng China Enterprises Index nearing a technical correction. A patchy economic recovery and intensifying concern over potential geopolitical risks stemming from the upcoming US election have hurt investor sentiment.
In FX, the Bloomberg Dollar Spot Index is flat while the Japanese yen is among the weakest of the G-10 currencies, falling 0.2% against the greenback. The euro reversed an earlier loss and traded roughly flat around $1.0840 after falling to as much as $1.0802 earlier with traders mulling the impact of a political gridlock in France on the country’s finances. Options traders remain bearish on the euro versus Group-of-four peers over the next week, albeit with lower conviction compared to the run-up to the French legislative elections.
“The worst outcome for the euro has been averted for now,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets in Singapore. “But the political situation in France remains uncertain and the fiscal balance is unlikely to improve significantly as a result”
In rates, treasuries were slightly cheaper across the curve, led by bear-flattening in bunds after an unexpected win by a left-wing coalition in the second round of French legislative election gave no party an absolute majority. Treasury yields are cheaper by ~2bp across the curve with front-end and belly leading losses, flattening 5s30s spread slightly, and 10-year just under 4.30%. The French yield premium vs German counterparts increased. US session has few scheduled events; ahead this week are two days of congressional testimony on monetary policy by Fed Chair Jerome Powell and coupon auction cycle, both starting Tuesday. Treasury issuance resumes Tuesday with $58b 3-year note sale, followed by $39b 10-year and $22b 30-year reopenings Wednesday and Thursday.
In commodities, oil edged lower after four straight weekly gains, even as traders tracked twin threats to crude production posed by a hurricane in the US and wildfires in Canada. WTI fell 1.1% to trade near $82.25 a barrel. Spot gold falls $20 to around $2,372/oz. Gold was steady, and iron ore extended a decline from a one-month high.
Looking at today's calendar, US economic data slate includes June New York 1-year inflation expectations (11am) and May consumer credit (3pm). Ahead this week are CPI, PPI and University of Michigan sentiment. No Fed speakers scheduled for Monday. Weekly calendar includes Barr, Bowman, Goolsbee, Cook, Bostic and Musalem in addition to Powell
Market Snapshot
Top Overnight News
A more detailed look at global markets courtesy of Newsquawk
APAC stocks were mostly lower as the region failed to resume the momentum from last Friday's dovish post-NFP reaction, while the weekend macro news flow was light aside from the French election results. ASX 200 was dragged lower by energy and mining stocks, while a surprise contraction in Home Loans added to the glum mood. Nikkei 225 faded after initially bucking the trend and hitting a fresh record high before reversing course, as participants digested mixed data. Hang Seng and Shanghai Comp. were pressured with underperformance in Hong Kong amid weakness in property stocks, while the mainland also lacked demand ahead of this week's key releases from China including CPI and the latest trade data
Top Asian News
European bourses, Stoxx 600 (+0.6%), began the session on a weaker footing with initial sentiment hampered by the French second round parliamentary elections, which resulted in a hung parliament. However, optimism soon lifted and benchmarks soared to session highs, CAC 40 +0.5%, potentially stemming from comments by French Socialist leader Faure who said the NFP will select a PM from within the alliance within the week, via AFP. European sectors hold a strong positive bias vs an initially negative bias. Insurance takes the top spot, with JPM noting that given the recent sell-off within the sector and specifically Axa (+1.5%), there is a buying opportunity. Elsewhere, Energy and Basic Resources both lag amid weakness in the crude and metals complex, respectively. US Equity Futures (ES U/C, NQ +0.1%, RTY +0.2%) are mixed and trading incrementally on either side of the unchanged mark. Sentiment has improved in recent trade, given the strength in European equities since the cash open.
Top European News
FX
Fixed Income
Commodities
Geopolitics: Middle East
Geopolitics: Other
US Event Calendar
DB's Jim Reid concludes the overnight wrap
The main story this morning is obviously the second round of the French elections where yet another electoral shock has been served up in 2024 with the far-left New Popular Front securing the surprise outcome of being the largest group. They are in line to win 182 seats (around 160 expected in the final Ifop poll on Friday). The far-right RN party and allies has claimed 143 seats (around 190 expected on Friday but edging lower all of last week). Macron’s ENS movement are looking set for 163 seats (around 135 expected on Friday). The tactical voting to block the far-right has succeeded so much that it’s swung the pendulum in the opposite direction but without anyone having an overall majority which would have been 289 seats.
The NPF have the most fiscally aggressive program in terms of both spending and taxation and the market will be suspicious that the prospect of them being in government now or later will bring higher deficits with the associated concerns about debt sustainability and tense relations with Europe. Last night the far-left were already talking about wealth taxes and increases on taxes on corporates which won’t be market friendly. However trying to build a government that has any kind of stability looks a very high bar this morning. Political paralysis for the next 12 months seems the most likely outcome. See our economists' blog overnight here for the most likely scenarios.
In addition to this, our economists, strategists and Euro rates and credit traders will host a call at 10am London time this morning. Please register here if you’d like to attend. So far this morning the Euro (-0.08%) is only trading fractionally lower at 1.0831 against the dollar while European equity futures tied to the STOXX 50 (+0.32%) are edging higher as I type. OAT futures are lower but well within the trading range from Friday.
Moving on, there’s a lot to digest this week with the US CPI report (Thursday) and Fed Chair Powell's testimonies to the Senate and House committees (Tuesday and Wednesday) the obvious highlights alongside PPI and the start of US Q2 earnings season on Friday with JP Morgan, Citi and Wells Fargo reporting.
Outside of these the day by day highlights are NY Fed 1-yr inflation expectations today, tomorrow’s US small business optimism survey to see if the “K” shaped recovery continues. Wednesday sees China’s CPI and PPI, Japan’s PPI, Norwegian and Danish CPI, Italian IP and a US 10yr Treasury auction. Thursday sees the latest US monthly budget numbers alongside jobless claims which will continue to get close attention given recent mixed signals on the US labour market. There is also a 30yr Treasury auction. On Friday the University of Michigan survey and Swedish CPI will be the highlight outside of the main events mentioned above. In geopolitics, there is a NATO summit Tuesday through Thursday, and Indian PM Modi visits Russia today and tomorrow both of which may generate headlines. The full week ahead is at the end as usual.
Let's now preview the US CPI and PPI releases and review a mixed payroll print on Friday. The headline CPI should print soft (+0.09% MoM DB forecast vs. +0.01% previously) thanks to falling gas prices. However core is expected to edge up (+0.25% MoM vs. +0.16%). If our economists are correct, YoY headline CPI will fall by two-tenths to 3.1%, with core edging up a tenth to 3.5%. However three-month annualised core would fall four tenth to 2.9%, though the six-month annualised rate would stay at 3.7%. For the PPI we always look at the categories feeding into core PCE, namely health care services, airfares and portfolio management. The final of these three should be firm given the recent rally in equities and airfares could bounce back after a weak May. This also could be the end of easy comps as our econ team point out that weak July and August prints will soon roll out of the YoY numbers.
This is important as if markets do want a September cut then a bit more progress is needed on inflation absent an “unexpected weakening” (in Powell’s words) in the employment situation.
With that in mind it’s useful to review a mixed employment report on Friday. Payrolls at +206k were decent but the last 2 months of revisions were -111k and private payrolls only expanded at +136k. Unemployment edged up a tenth to 4.1% and is now 0.7pp above its cyclical lows. This hasn’t yet triggered the Sahm rule of a recession always occurring after unemployment rises 0.5pp from its lows, as the rule deals in 3 month moving averages. However at 0.43pp it is now close.
Where this time could be slightly different for the Sahm rule, or at least require a higher trigger, is that the participation rate continues to improve. On Friday for example, the prime-age (25-54 age group) participation rate hit 83.7%, its highest since 2001. Also new entrants to the labour force was the highest since 2017. So as unemployment rises go (and it was a soft 4.1% given the 2 decimal print was 4.05%) it was a decent one.
In Asia, Chinese stocks are underperforming with the Hang Seng (-1.21%) leading losses followed by the Shanghai Composite (-0.54%) and the CSI (-0.47%). The Nikkei (+0.20%) and the KOSPI (+0.10%) are seeing minor gains. S&P 500 (-0.12%) and NASDAQ 100 (-0.11%) futures are edging lower and 10yr UST yields are up a basis point.
Early morning data showed that labour cash earnings in Japan grew +1.9% y/y in May (v/s +2.1% expected), but still marking the biggest gain since June 2023. It followed a downwardly revised increase of +1.6% in April. Meanwhile, real wages fell -1.4% y/y in May (v/s -1.2% expected) with the decline extending to a record 26th straight month. Japan's current account surplus grew for the 15th straight month swelling to 2.85 trillion yen in May (v/s 2.35 trillion yen expected) from the previous month’s 2.05 trillion yen surplus.
In central bank news, the People’s Bank of China (PBOC) revealed this morning that they would start conducting temporary bond repurchase agreements or reverse repos to make open market operations more efficient, aiming to maintain sufficient liquidity in the banking system.
Looking back at last week now and markets continued to advance, as poorer data led investors to dial up the chance of future rate cuts. Indeed on Friday, there was a very underwhelming US jobs report (discussed above), which added to the run of weak data recently.
The payrolls report came on the heels of some weak ISM services and manufacturing prints earlier in the week, and it led to a sharp rally in US Treasuries. For instance, the 2yr yield ended the week down -15.0bps (-10.2bps Friday) at 4.60%, which is its lowest closing level since March. And the 10yr yield was also down -11.8bps last week (-8.0bps Friday) to 4.28%. Hopes for a rate cut were also evident from fed funds futures, and by the end of the week they were pricing in 50.8bps of cuts by the December meeting, so at least two 25bp rate cuts are now fully priced in by year-end. But in Europe it was a different story, with yields on 10yr bunds ending the week up +5.6bps (-5.3bps Friday) at 2.55% as French political risk reduced.
Finally, risk assets did pretty well against this backdrop, as the prospect of rate cuts outweighed the weak economic data. That helped the S&P 500 to end the week at another all-time high, posting a +1.95% gain (+0.54% Friday). And the moves were echoed elsewhere, with Europe’s STOXX 600 posting a +1.01% gain (-0.18% Friday), whilst Japan’s Nikkei was up +3.36% (unch. Friday). Otherwise, we also saw Brent crude oil prices rise for a fourth consecutive week to $86.54/bbl, and gold prices were up +2.81% (+1.51% Friday) in their best week since early April.