Summary: Markets are sideways as we await whether the Fed confirms a pivot to a neutral stance on further tightening at the FOMC tomorrow. US Secretary Treasury Yellen warned of an early June time frame for US debt default risk. US treasury yields rose sharply and took the JPY sharply lower once again. This morning, the Reserve Bank of Australia surprised the market by raising rates 25 basis points, sparking a steep rally in the Australian dollar this morning.
Despite the failure of First Republic Bank, a bank with $233bn in assets sold to JPMorgan Chase, US equities managed to hold on to the gains from last week in yesterday’s session. S&P 500 futures are bouncing a bit this morning trading around the 4,186 level with a close above 4,200 being a significant milestone for the US equity market recovery and not seen since August last year. While First Republic Bank’s failure turned out not to create the beginning of a new banking crisis, Charlie Munger, the vice chairman of Berkshire Hathaway, did warn in an interview that many smaller banks in the US had too many commercial real estate loans and that those loans would become a problem.
A sharp rise in US treasuries yesterday sent the Japanese yen lower still, with USDJPY slicing up through its 200-day moving average near 137.00 and trading nearly to the highs of the year from early March just shy of 138.00. But the big move overnight was the Australian dollar, which rose over a percent versus the US dollar and more so elsewhere after the RBA surprised expectations with a 25 basis point rate hike (more below). EURUSD remains sticky near 1.1000 as the market awaits both the FOMC and ECB meetings on Wednesday and Thursday, respectively.
Crude oil prices chopped around on Monday ending the day a dollar lower and below $80 in Brent as the weekend data from China showed a slump in manufacturing activity, even as travel demand showed signs of a recovery at the start of the Golden Week holiday (read below). WTI traded near $75.50/barrel after a decline of 1.5%. The Fed meeting a key focus ahead but the market will also be watching the impact of the new production cuts from OPEC announced at the start of April. The agreement to cut output by 1.6mb/d officially begins this week.
Gold prices surged higher on Monday together with especially silver and copper prices in a strange move, given its timing (thin due to many markets out on holiday in Asia and Europe). Alas, the move quickly faded, especially as US treasury yields rose on the day and the metals complex ended the day lower, with gold still below $2,000/ounce. What happens next could set the short-term direction for gold as the market seeks confirmation that rates indeed will start to come down from June and onwards. A 60bps reduction is priced in before year-end, down from 75bps last week and any further lowering of expectations may trigger a move towards the key $1955-60 support area. Silver meanwhile holds above the key support at $24.50 area.
US Treasury yields rose sharply yesterday, with much of the rise coming in the wake of the April ISM Manufacturing survey release, where the Prices Paid component was higher than expected and the highest in nine months. The US 2-year treasury yield backed up to near 4.15% this morning, almost 15 basis points higher from the Friday close, while the 10-year benchmark rose a similar amount, trading this morning near 3.56% and needing to rise above 3.64% to break above the range established since the Silicon Valley Bank collapse.
The RBA surprised the market with a 25-basis point rate hike, taking the cash rate target to 3.85%, a move that was almost entirely un-priced into market expectations (though a minority of surveyed economists predicted the move). This sent AUDUSD sharply higher, trading above 0.6700 this morning, while a EURAUD sell-off and surge in AUDJPY continued significant recent moves in those crosses. The guidance in the statement also left room for additional hikes: “some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve.”
Although many have argued recently that larger than expected tax revenues could push the crunch time for the US debt ceiling issue (which would entail a default on US debt if the debt limit is not raised) into July or even August, US Treasury Secretary Yellen and the Congressional Budget Office warned yesterday that the limit must be raised by early June or the US risks defaulting. This has sent some congressional members scrambling, with a meeting next week scheduled with President Biden and the top four congressional leaders. Democrats and the president have called for a clean increase, but a disciplined slim Republican majority in the House is likely to hold its ground and Senate Republicans said they would block a “clean” (no strings attached) increase of the debt limit with a filibuster.
ISM Manufacturing PMI rose to 47.1 in April, above the expected 46.8 and prior 46.3, but remained in contractionary territory, while the prices paid component jumped to 53.2 (exp. 49.0, prev. 49.2). New orders and employment lifted to 45.7 (prev. 44.3) and 50.2 (prev. 46.9), respectively. While the data showed that US manufacturing sector is still seeing slowing activity, there are some hints of a stabilization. Still, inflation concerns remain apparent. Meanwhile, US S&P Global PMI rose to 50.2 in April from 49.2 previously, jumping into expansion territory.
NXP Semiconductor, of the largest suppliers of semiconductors to the global car industry, beat on both Q1 revenue and earnings yesterday while posting a Q2 guidance comfortably above consensus estimates driven by strong outlook for its customers in the car industry and the industrial sector.
HSBC reports Q1 pre-tax profit $12.9bn vs est. $8.6bn driven by strong net interest income. The bank is also announcing a $2bn buyback and special dividend of $0.21 per share. The CEO says that SBV acquisition in UK was a great opportunity and maintain that issues at banks are not a global systemic problem.
The important benchmark price on lithium carbonate out of China has risen 8% over the past week suggesting that the market might have reached a turning point. Tesla is raising prices on its Model 3 and Model Y suggesting the carmaker is constantly fine-tuning its price points relative to demand and profitability.
Coming into this week the ECB is priced to hike 25-basis points on Thursday and the forward curve almost fully pricing two additional rate hikes through the September meeting this year. A couple of important data points are up today that could help shape the size of the ECB hike as well as how much further tightening is flagged in the ECB’s guidance at its meeting on Thursday. First, the ECB will release its quarterly survey of bank lending and second, the Eurozone reports April flash inflation figures after the German flash April CPI report on Friday came in slightly softer than expected. The market is looking for the Eurozone to report core inflation of 5.6% YoY after 5.7% in March, which was also the cycle high.
The Fed is expected to hike 25 basis points at the FOMC meeting on Wednesday, with the suspense for the market centering on how willing the Fed is to confirm market expectations that this will be the last rate hike for the cycle, or at least for now. Indeed, despite Fed pushback, the market continues to price that the economy will weaken sufficiently in the coming six months to see the Fed cutting rates as soon as September, with more than 50 basis points of easing priced through the December FOMC meeting. This week also brings the usual flurry of first-week-of-the-month US data, including the April ISM Manufacturing survey Monday and ISM Services survey Wednesday, with the April jobs report up on Friday.
Today’s US earnings focus is on AMD (aft-mkt), Starbucks (aft-mkt), and Uber Technologies (bef-mkt). We wrote a earnings preview yesterday highlighting AMD earnings outlook which must deliver tonight against high expectations that have come about due to the recent AI hype over ChatGPT. Analysts expect Uber Technologies to report Q1 revenue of $8.7bn up 27% y/y and EBITDA of $679mn compared to a loss of $192mn a year ago indicating that Uber has finally reached a size when profitability is improving.
0715-0800 – Eurozone Apr. Final Manufacturing PMI
0800 – Euro Area Bank Lending Survey
0900 – Eurozone Apr. CPI estimate
1120 – Australia RBA Governor Lowe to speak
1400 – US Mar. JOLTS Job Openings
1400 – US Mar. Factory Orders
2245 – New Zealand Q1 Employment/Wage data
0130 – Australia Mar. Retail Sales Quarterly Outlook
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Chief Investment Strategist
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Head of Fixed Income Strategy
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Head of Commodity Strategy