US futures extended gains for the 3rd straight day and are on pace to rise 6 of the past 7 days, led by the Nasdaq 100 which is set for its best March in more than a decade as investors bet on a softening in central-bank policy amid worries about a recession while the slowdown in new money market fund injections eased fears about the ongoing bank run.
Contracts on the Nasdaq 100 were up 0.3% as of 7:45 a.m. in New York, while S&P 500 futures also rose 0.2% hitting the highest level in 6 weeks.
For the month, the tech-heavy gauge is tracking an increase of about 7.7%, its biggest March advance since 2010. The benchmark S&P 500 is also set for a small monthly gain as the rates outlook overshadowed concerns about turmoil in the banking sector and a possible economic contraction.
The dollar strengthened Friday, trimming some of its sharp declines this month. Treasury yields steadied at the end of a quarter of wild swings. Investors have struggled to adjust for banking collapses and the shifting outlook for interest rates amid high inflation and threats to economic growth. The two-year yield was around 4.13% Friday while the 10-year maturity was about 3.55%.
Among notable premarket movers, Nikola Corp. dropped 8.6% after a $100 million share offering priced at a 20% discount to the stock’s last close. Digital World Acquisition Corp., the special-purpose acquisition company merging with Trump Media, rallied as much as 16% following former President Donald Trump’s indictment. Virgin Orbit shares slump a record 40% after the satellite launch provider said it’s ceasing operations indefinitely. Here are the other notable premarket movers:
US stocks have experienced a big sector rotation this month with technology stocks rallying amid bets of lower interest rates, while economically-linked cyclical sectors lagged behind following their outperformance at the start of the year. The Nasdaq 100 is up nearly 19% in the first quarter, its best January-March performance since 2012. That rotation prompted momentum-chasing penguins, pardon strategists at Citigroup to upgrade US stocks to overweight from underweight, saying they “perform more defensively than other markets” during earnings recessions.
Michael Hewson, chief market analyst at CMC Markets UK, said US stock markets “have undergone a bit of a crisis of confidence with concern about the effects of much higher rates giving way to concern about the health of the US banking system.”
On the outlook for rates, all eyes Friday are on the so-called PCE Core Deflator, which is expected to show a slight easing of price pressures in February, though it should still be well above target. A round of Fed speakers on Thursday suggested more monetary tightening was necessary to quell inflation, even after the collapse of three US banks this month.
“The Fed’s preferred measure of inflation could generate some volatility within the fixed income markets if we see any surprises,” economists at Rand Merchant Bank in Johannesburg wrote in a note. “Risks are tilted to the upside, and if the data shows that inflation pressures remained strong in February, the inversion of the US yield could deepen even further.”
Traders will also be on guard for any choppiness amid quarter-end rebalancing from pension funds and options hedging activity, especially the famous JPM collar which has a 4065 strike. And they continue to debate the extent to which policy makers may cut interest rates this year. Several strategists have said markets are wrong to expect easing by the Fed this this year as the labor market remains robust, though US unemployment claims ticked up for the first time in three weeks.
European stocks are ahead with the Stoxx 600 up 0.3% and on course for a third day of gains. Personal care, retailers and consumer products are the strongest-performing sectors while miners and banks fall. Here are some notable premarket movers:
Earlier in the session, Asian stocks headed for a fourth day of gains as data showed China’s economy gained momentum in March, while concerns about global banking turmoil and elevated interest rates eased. The MSCI Asia Pacific Index rose as much as 1.1%, set to cap a second-straight weekly gain, boosted by consumer discretionary and materials shares. Most regional markets gained, led by Japan, South Korea and Hong Kong. Indian shares jumped after returning from a holiday. Chinese stocks got a boost after a report that manufacturing continued to expand amid a strong pickup in services activity and construction. The report offered investors more confidence about an economic rebound after stringent Covid restrictions were dropped. Spinoff plans for JD.com and Alibaba units also lifted sentiment for tech shares. Read: China’s Strong PMIs Show Economic Recovery Gaining Traction The latest data “confirms the early cycle economic recovery is on track, paving the way for earning revisions to stabilize and improve from 2Q,” analysts at UBS Global Wealth Management’s chief investment office wrote in a report. “We expect over 20% upside for MSCI China by year-end, with the recent consolidation presenting an attractive entry point.” Globally, concerns over the financial sector continued to cool and investors digested a round of Federal Reserve commentary. Bank of Boston President Susan Collins said the banking system is sound and more interest-rate increases are needed to bring down inflation.
Japanese stocks rebounded, following US peers higher, as concerns over the financial sector continued to cool and investors digested a round of Fed commentary. The Topix Index rose 1% to 2,003.50 as of market close Tokyo time, while the Nikkei advanced 0.9% to 28,041.48. Mitsui & Co. contributed the most to the Topix Index gain, increasing 7.6%. Out of 2,160 stocks in the index, 1,471 rose and 588 fell, while 101 were unchanged. Meanwhile, Japanese semiconductor-related stocks pared earlier gains after Japan said it will tighten chip gear exports to help restrict tech shipments to China. Japan Trading Firms Gain on Reported Plans to Improve Returns “Besides the stabilizing overseas markets, expectations for firm corporate earnings outlooks are also boosting Japanese equities,” said Rina Oshimo, a senior strategist at Okasan Securities. “Japan’s macro economy this year is more resilient than overseas, mainly driven by reopening growth, and the government’s policy for childcare support is also positive material.
Australian stocks also advanced: the S&P/ASX 200 index rose 0.8% to close at 7,177.80, boosted by mining and bank shares. Stocks across Asia advanced with US and European equity futures, underscoring investor optimism in the face of banking turmoil and elevated interest rates. The benchmark snapped seven weeks of losses, rising 3.2% for the week, the most since the week of Nov. 11. The index also posted a second straight quarter of gains. The focus will now be on Australia’s central bank, which is set to make a rate decision Tuesday. The RBA is expected to keep borrowing costs unchanged at next week’s meeting, delivering its first pause since initiating a policy tightening cycle in May 2022. In New Zealand, the S&P/NZX 50 index fell 0.4% to 11,884.50.
India stocks rallied the most in more than four months on Friday bouncing back from their oversold levels to trim losses for the quarter. The S&P BSE Sensex Index rose 1.8% to 58,991.52 in Mumbai, while the NSE Nifty 50 Index advanced 1.6% to 17,359.75. The gauges posted their biggest single-day rallies since Nov. 11, narrowing their losses for the quarter to 3% and 4%, respectively. Even with the gains this week, the indices clocked their worst quarterly performance since June 2022 after scaling to their record peaks in December. Globally tightening monetary conditions and the impact of inflation have dampened the outlook for economic growth and shrunk the valuation gap that India enjoyed over its peers. Foreigners turned buyers of local shares in March after three straight months of outflows, purchasing a net of $1.4b of stocks through March 28, while domestic institutional investors remain supportive of equities. Reliance Industries contributed the most to the Sensex’s advance, increasing 4.3% after the company firmed up its plan for separating its financial services business, a move that will potentially result into value creation for the country’s biggest listed firm. Out of 30 shares in the Sensex index, 26 rose and 4 fell
In FX, the Bloomberg Dollar Spot Index rose 0.2%, boosted by gain versus the yen; the dollar is set to end the quarter 1.4% lower, its first consecutive quarterly loss in more than two years, amid easing concerns about the global banking sector and money market wagers on Federal Reserve interest-rate cuts. USD/JPY rallied as much as 0.8% as Japan’s fiscal year-end flows dominated and haven bids waned amid easing concerns about the global banking sector; International Monetary Fund said the nation’s central bank should avoid a premature exit from monetary easing.
In rates, US 10-year yields are down 2 bps at 3.537% ahead of the core PCE data due later today. Treasury 2-year yields cheaper by ~2bp on the day with 2s10s flatter by 3bp to -61bp from a high of around -50bp Thursday. Bunds outperform little-changed US 10-year by 2bp while gilts lag by 3bp. Earlier, ECB rate-hike premium was unwound slightly after euro-area core inflation accelerated to 5.7% in March, matching the median forecast. IG dollar issuance slate empty so far; a couple of names priced $1.4b Thursday, leaving March total around $100b vs $150b that was expected. Bund futures rallied as traders trimmed ECB rate bets after euro-area inflation slowed more than expected in March, although the core rate did accelerate. German 10-year yields are flat at 2.37% while the Euro is down 0.2% versus the greenback. US economic data slate includes February personal income/spending with PCE deflator (8:30am), March MNI Chicago PMI (9:45am) and March final University of Michigan sentiment (10am).
In commodites, US crude futures are little changed with WTI at $74.35. Spot gold is also flat around $1,980
Looking to the day ahead. We have quite a busy day data wise, with the US PCE deflator data, the March MNI Chicago PMI and the February personal spending and income data. In Europe, we have the Eurozone March CPI data and the February unemployment. We will also see the release of the Italian March CPI and the January industrial index, the German march unemployment change, February retail sales and the import price index, and lastly the French March CPI. February CPI and consumer spending. Finally, we will hear from several central bankers, including the ECB’s Lagarde and Kazaks, as well as the Fed’s Williams, Waller and Cook.
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Asia-Pac stocks were mostly firmer at quarter-end as they took impetus from the tech-led gains on Wall Street and with participants digesting a slew of data releases including better-than-expected Chinese PMI figures. ASX 200 was led by the mining and resources sectors after the strong data from Australia’s largest trading partner although the upside was capped ahead of next week’s RBA meeting with a recent Reuters poll showing near-even expectations amongst economists between a hike and a pause. Nikkei 225 gained heading into the end of the fiscal year and climbed back above the 28,000 level after encouraging Industrial Production and Retail Sales data but was off highs with chipmakers later pressured after Japan announced to impose new restrictions on chip-making gear. Hang Seng and Shanghai Comp. were positive after the strong Chinese PMI data in which Manufacturing PMI topped forecasts and Non-Manufacturing PMI rose to its highest since 2011, with the outperformance in Hong Kong led by tech as JD.com plans to spin off its industrials and property units. However, the gains in the mainland were limited amid a deluge of earnings releases including mixed results from China’s mega-banks and with the nation’s largest property developer Country Garden posting its first annual loss since its listing in 2007.
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European bourses are firmer, Euro Stoxx 50 +0.3%, continuing the positive APAC tone with incremental impetus from as-expected EZ Core HICP. Sectors are mixed with Banks lagging as yields retreat post-HICP while Personal Care/Drug names outperform. Stateside, futures are incrementally in the green with the tone more cautious ahead of PCE data and Fed speak, incl. Williams, thereafter.
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DB's Karthik Nagalingam completes the overnight wrap
For a fourth straight day, market behaviour was rather benign with risk-sentiment remaining positive and volatility ebbing. Equity indices in both the US and Europe rose moderately, while longer-dated sovereign yields in the two regions diverged as inflation data is coming back to the foreground. Hotter-than-expected European inflation led to a selloff in bonds, and today we will get more inflation data from both sides of the pond.
Given the calmer market narrative around the global banking system, focus today will be on the US PCE data. Fed members had an approximation of what PCE would look like given recent CPI and PPI prints when they rose rates 25bps last week but seeing how the underlying components are tracking may force market participants to refocus on pricing pressures. However, the market is likely to look through anything but an extraordinary print, given that the recent banking crisis will not be reflected in the data. Our US economists see a +0.36% advance for core PCE in February (+0.57% in January) and m/m declines for both income (-0.1% vs +0.6% in January) and consumption (-0.6% vs +1.8%).
Ahead of the PCE print there was a bevy of Fed speakers yesterday, all of whom highlighted the fact that inflation remained too hot. Boston Fed President Collins (non-voter), while at a conference in Washington DC said, “Inflation remains too high, and recent indicators reinforce my view that there is more work to do.” Separately, Minneapolis Fed President Kashkari (voter) said that the stresses on the banking sector could last longer than expected, but also said that “the services part of the economy has not yet slowed down and … wage growth is still growing faster than what is consistent with our 2% inflation target.” Lastly, Richmond President Barkin (non-voter) said that “if inflation persists, we can react by raising rates further,” and pointed out that the committee was discussing a 50bp hike just a few weeks ago. He had no stated preference on the size of a future rate hike, but he said that continuing to fight inflation was the priority.
These comments did little to change fed futures yesterday, as the market priced in just an extra +4.0bps for the rate following the December Fed meeting, increasing expectations to 4.387%. That was their highest closing level since March 10 - the day of the collapse of Silicon Valley Bank. The expectations around the May meeting rose marginally, with futures now pricing in a 55% chance of a 25bp hike, up from 47% the day before. While fed speakers don’t seem ready to talk about cutting rates, the market is still pricing in over two 25bps rate cuts by year-end after hitting a terminal rate in May.
Against this backdrop, the more policy sensitive US 2yr yield was up +2.1bps to 4.12% – returning to roughly where they were before the most recent Fed rate hike on the 21 March. Meanwhile the US 10yr yield fell back -1.5bps after trading in a tight 6bp range all day, although yields have slightly pulled back (+1.51bps) overnight as we go to print. It was a different story in Europe, as 10yr bund yields rose +4.6bps to 2.37% and German 2yrs rose +9.5bps to 2.75%, their highest level since the third week of March. 10yr OATs (+5.2bps) and BTPs (+8.5bps) underperformed, while 10yr gilts yields rose by +4.6bps as well.
As noted above, the selloff in European bonds began after the German inflation print showed an unexpected acceleration in price growth, with German CPI up to +0.8% (vs +0.7% expected) month-on-month, and +7.8% year-on-year (vs +7.5% expected) on the EU-harmonised measure. Eurozone CPI data for March later today will complete the picture, and our European economists expect euro-area EU-harmonised CPI to fall from 8.6% in February to 7.1% year-on-year, but with risks slightly to the upside following the German print. See their note here.
Following the upside surprise on German CPI, the terminal ECB rate priced in by overnight index swaps for the December meeting climbed +10.7bps to 3.44%, pricing in barely any cuts (5bps) by the end of 2023 with the terminal rate expected for October at 3.49%.
Turning to equities, the S&P 500 was up +0.57% with all but 3 of 24 industry groups gaining on the day. Semiconductors (+1.61%), consumer discretionary retail (+1.21%), and real estate (+1.19%) outperformed. The outperformance of technology continued, leading the NASDAQ (+0.73%) to maintain its trajectory for its best quarter since 2020. The only three S&P 500 industries down on the day were diversified financials (-0.13%), consumer durables (-0.21%) and banks (-1.00%). The underperformance in banks was primarily driven by the regionals with First Republic (-4.0%) the clear laggard, while Fifth Third (-2.6%), Zion (-2.4%), and M&T Bank (-2.3%) were in the next tier of underperformers. The larger banks outperformed with Citi (+0.3%) the only S&P bank constituent higher on the day, while JPM (-0.3%) and BofA (-1.3%) saw smaller losses.
After markets closed, the Fed released their weekly H.4.1 balance sheet data showing how banks were using the Fed’s new bank lending facility and the discount window. Over the prior week, discount window borrowing was down from $110bn to $80bn, there was no further extension of credit to SVB or Signature, and the bank term funding program saw increased borrowing of $64bn from $54bn the week prior. The foreign repo facility, FIMA, saw use fall from $60bn to $55bn. Overall this shows modest improvement across the complex and should add to the narrative that the pain is mostly contained.
In Europe, the STOXX 600 similarly gained on the day (+1.03%), with real estate (+3.74%) as well as information technology (+2.54%) driving performance. Food and Beverage (-0.47%) was the only industry group weaker off the back of the German CPI data, as the finer details of the release showed price inflation for food inched higher. Additionally, unlike in the US, European financials continued to rally back yesterday with as European banks climbed +1.84% and are now up +6.62% on the year. Looking into other bourses, the CAC and the DAX were up +1.06% and +1.26% respectively.
This morning, Asian equity markets have carried over the overnight gains on Wall Street. Across the region, the Hang Seng (+1.46%) is leading gains with the KOSPI (+1.06%), Nikkei (+1.01%), CSI (+0.35%) and the Shanghai Composite (+0.33%) also rising. In overnight trading, US equity futures are pointing to further gains with those on the S&P 500 (+0.28%) and NASDAQ 100 (+0.34%) edging higher.
China equities are outperforming following the official manufacturing PMI beating expectations at 51.9, and the non-manufacturing PMI rising to 58.2 in March. That is the non-manufacturing index’s highest level since May 2011. This data suggests that the economic recovery in the world’s second biggest economy remains on track even amid weaker global demand and a continued property market downturn.
There was also a batch of economic data out of Japan indicating that inflation in Tokyo is still above trend after coming in at +3.3% y/y in March (vs +3.2% expected) compared to +3.4% recorded last month. At the same time, core Tokyo CPI rose +3.2% y/y (vs +3.1% expected) in March, following a peak of +4.3% back in December. So further improvement but not as much as the market was looking for. Labour market conditions loosened slightly as the unemployment rate unexpectedly rose to +2.6% in February from +2.4% in January, while the jobs to applicant ratio moved lower to +1.34 (vs +1.36 expected). Retail sales jumped +1.4% m/m in February, compared to January’s downwardly revised increase of +0.8%. Meanwhile, industrial production rebounded +4.5% m/m in February (vs +2.7% expected) on easing supply bottlenecks for carmakers.
It was a big day for data release yesterday. Starting with the US, weekly jobless claims came in at 198,000 (vs 196,000 expected) suggesting a slight softening in an otherwise tight labour market. Continued claims was lower than expected (1,689k vs 1,700k expected), having remained in a tight range over the past few months now. The third revision to 4Q’22 US GDP saw annualised quarter-over-quarter GDP taken down to 2.6% (2.7% prior) on the back of lower personal consumption (1.0% vs 1.4% prior). 4Q’22 PCE was revised +0.1pp higher to 4.4%.
In Europe, we had several confidence data points for March in the Eurozone demonstrating a slight weakening relative to February. Economic confidence was down to 99.3 (vs 100 expected), industrial confidence became negative at -0.2 (vs 0.5 expected) and services confidence fell a tenth to 9.4 (vs 10 expected). Consumer confidence remained steady at -19.2. This contrasted with the services-driven improvement in the PMIs for March. Looking on the individual country level, the Spanish CPI rose +1.1% month-on-month (vs +1.6% expected) and +3.1% year-on-year (vs +3.7% expected) year-on-year on the EU-harmonised measure. Italian February PPI came in at -1.3% month-on-month, and 10% year-on-year.
Finally on commodities, oil rose sharply again yesterday for its third gain out of the last 4 days, as Bloomberg reported that it is highly unlikely that exports from Iraq will resume this week. Officials from the Kurdistan Regional Government are set to re-enter discussions with Iraqi officials early next week. WTI crude contracts were up +1.92% to $74.37/bbl whilst Brent crude hit $79.27/bbl after climbing +1.26%.
Now to the day ahead. We have quite a busy day data wise, with the US PCE deflator data, the March MNI Chicago PMI and the February personal spending and income data. From the UK we have the March Lloyds business barometer and the Q4 current account balance. In Europe, we have the Eurozone March CPI data and the February unemployment. We will also see the release of the Italian March CPI and the January industrial index, the German march unemployment change, February retail sales and the import price index, and lastly the French March CPI. February CPI and consumer spending. Finally, we will hear from several central bankers, including the ECB’s Lagarde and Kazaks, as well as the Fed’s Williams, Waller and Cook.