Summary: Risk sentiment surged yesterday, perhaps as yields fell again despite the fear of increased Treasury issuance creating a liquidity pinch in the wake of the debt ceiling impasse lifting. Equity markets were resurgent, the US dollar traded sharply lower, commodity prices rose, and US treasury prices did as well at a time when the US futures positioning shows a record speculative short in aggregate US treasury positioning. Elsewhere uranium stocks are surging while the oil market awaits another OPEC+ meeting.
After stumbling for two days, US equities roared back higher yesterday, with the S&P 500 crossing back well above the 4,200 and posting its highest daily close for the cycle and since last August at 4,221 for the cash index. The Nasdaq 100 likewise brushed off the prior couple of days of consolidation and rose to close at its highest level in over a year at 14,441. Softer treasury yields are likely a significant driver of the strong tone in risk sentiment.
After a long period of solid strength and discussion that the lifting of the debt ceiling impasse will lead to a crunch in USD liquidity as the Treasury rebuilds its reserves, the US dollar weakened sharply yesterday on the very day that the Senate also passed the new debt ceiling deal. The technical situation bears watching in the days ahead, but the USD rally looks to be reversing in places if it follows through higher on the other side of today’s US May jobs report even if there is considerable work to do in many pairs for the USD to threaten a breakdown. USDJPY, for example, will have to break back down through the 200-day moving average, currently near 137.30 to suggest the recent rally sequence has reversed.
Crude oil trades higher for a second day, supported by Thursday’s general improvement in risk appetite and traders pairing back recent sales ahead of the OPEC+ meeting over the weekend. A meeting that could deliver additional price support although consensus point to a no-change. Not least considering OPEC’s own analysis that points to a pick up in demand during the second half and the timing coming so shortly after the April cut, the impact of which has yet to be felt. However, given the recent rant against speculators from the Saudi energy minister, nothing can be ruled out, and with that in mind positions are likely to be scaled back ahead of the weekend.
Gold has returned to challenge resistance above $1980 and is currently on track to record its best week since April. The lifting of the debt ceiling cloud has taken bond yields and the dollar lower while reducing bets on a July rate hike. In addition, US economic data released on Thursday showed some progress on getting inflation under control. Key however remains developments in the job market, hence the focus on today’s US job report which is expected to show a weaker jobless number than last month. Resistance at $1984, the 21-day moving average ahead of $2000.
US Treasury yields dropped across the yield curve yesterday, and the yield curve bull steepened Lower than expected inflation in Germany, a weak recovery in China, and Fed's members' speeches contributed to a drop-in rate hike bets for June, hence falling US Treasury yields. We still believe that the risk of a liquidity squeeze is a risk event that cannot be discarded as the Treasury has to sell a total of $1 trillion net debt issuance to replenish its cash reserves. Approximately $500 billion in net debt must be raised in four weeks. That would be the biggest quarterly net issuance outside of a crisis such as the pandemic and the global financial crisis. Thus, a bear flattening of the yield curve might resume before rates drop for good. We focus on today’s Friday’s non-farm payrolls, especially the average hourly earnings. If the average hourly earnings are weak, markets might forecast the Fed to stop rate hikes, pushing 2-year yields below support at 4.21%. Yields might resume their rise next week as the US Treasurysells substantial amounts of T-bills.
The Gilt yield curve bull fattened as US Treasury yields dropped. However, the British Retail Consortium showed on Tuesday that shop price inflation accelerated by 9% YoY, the highest on record. Therefore, there continues to be scope for yields to soar as the Bank of England prepares to hike rates further. We believe that the front part of the yield curve is too rich. Yields might resume their rise. However, they may not break above 5%, which proved problematic last September during Truss’ mini-budget crisis.
The Direction 20+ Year Treasury Bull 3X (TMF:arcx) more than doubled its assets as investors bought it amid speculations that the Fed is done with its rate hiking cycle. Yet, it returned only 2% YTD, while it plunged 73% in 2022, showing that the strategy didn't take off yet. On the contrary, the Ultra Short 20+ Year Treasury ERF (TBT:arcx) suffered from the worst outflows showing that there might be little downside in US Treasury still.
Uranium stocks surged around the world on Thursday after the US Senate Environment and Public Works Committee advanced a bill that would fast-track the deployment of a new fleet of advanced nuclear reactors. It would direct the U.S. Nuclear Regulatory Commission to examine its processes for licensing nuclear power plants and study whether the guidelines could be modified to quickly approve advanced nuclear reactors. In particular, the bill calls for hastening approvals of next-generation reactors to be built at former industrial of commercial facilities and directs the NRC to coordinate efforts between the U.S. and other countries seeking to develop nuclear power and to help train nuclear safety regulators abroad. The Global X Uranium ETF trades up 10% since Tuesday while Canada’s Cameco Corp added 12.4% to reach a 12-year high.
The US Senate passed the debt ceiling bill yesterday with a bipartisan vote of 63-36 after the House had passed it earlier this week and will now cross President Biden’s desk. With his signature certain today, the debt ceiling issue will recede until at least early 2025, with some observers suggesting that the net fiscal restraint in the bill will knock 10 to 20 basis points !0.1-0.2%) off projected GDP growth in the coming year.
The unit labor costs increased 4.2% for Q1, which was sharply revised down from 6.3% previously reported and much below the consensus estimate of 6%, suggesting milder pressure from labor costs on inflation. The steep 9-point decline in the prices paid component of the ISM manufacturing survey provides additional comfort to a moderating trend in inflation. The headline ISM manufacturing index decreased to 46.9 (consensus 47.0) in May from 47.1 in April.
Ahead of the highly anticipated employment report, the ADP private sector employment data revealed a larger-than-expected change of 278k in May. Although slightly softer than the downward-revised 291k (previously reported as 296k), the figure still surpassed economists' estimates of 170k. Meanwhile, weekly initial jobless claims came in at 232k, lower than the consensus estimate of 235k.
According to a survey conducted by Bloomberg, economists anticipate that the US economy will add 195k jobs to non-farm payrolls in May, reflecting a smaller job addition compared to the 253k reported in April. The unemployment rate is expected to tick up to 3.5% in May from 3.4% in April. Furthermore, the consensus forecast for average hourly earnings growth in May stands at 0.3% M/M (vs 0.5% in April) and 4.4% Y/Y (vs 4.4% in April).
Eurozone flash CPI exhibited a decline, sliding from 7.0% in April to 6.1% in May, falling short of the consensus forecasts of 6.3%. Adding to the subdued outlook, core CPI growth experienced a downturn from 5.6% in April to 5.3% in May, revealing a softer reading compared to the anticipated 5.5%. Moreover, recent inflation data emanating from Germany, France, and Spain, unveiled over the preceding two days, also displayed a weaker performance than originally expected.
The timing of yesterday’s strong rally in nearly everything save for the US dollar: stocks, bonds, commodities may not be a coincidence as it came on the very day that it is quite clear that the debt ceiling impasse will lift and allow the US Treasury to rebuild its reserves, which is thought to bring hundreds of billions of US dollars in new US Treasury issuance and a pinch on liquidity. Looking over at the speculative positioning in the US treasury market and we can see a record short in aggregate of the two- to 30-year treasuries. Is this a case of the market already having positioned itself ahead-of-the-fact? If US treasury yields are able to remain stable and even fall, it might suggest that the market was well prepared for the event and ironically lead to further pull higher in risky assets and weakening of the US dollar. Incoming data like today’s US jobs data could also prove a factor in the mix here, although yesterday’s very strong ADP payrolls change number failed to lift yields notably.
Earnings season is winding down after yesterday’s handful of interesting names reporting. Tune in to Monday’s Quick Take for a fuller view of the week ahead in earnings releases. Here are a few names that will be reporting next week.
Economic calendar highlights for today (times GMT)
1230 – US May Change in Nonfarm Payrolls
1230 – US May Average Hourly Earnings
1230 – US May Unemployment Rate
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