Risk Rally Resuscitates S&P
An equities rally halted the S&P 500’s longest losing streak since Feb, plus US inflation data, key loan and trade figures from China and a Bank of England meeting.
Alex Davis & Litquidity Capital
May 08, 2023
Together with
Good afternoon,
Short-covering is back in style heading into the week. The market looks set to rebound following the fire sales of last week.
Just when you thought T-bills couldn’t get more boring by comparison, the Treasury unexpectedly announced a new program to buy back older securities.
And Lululemon hosted its first-ever “dupe swap.”
Let’s dive in.
Economy Heat Check
As of 5/5/2023 market close, unless otherwise stated.
Friday Flashback
Ongoing concerns that the US government could default on its debt saw the 1-year credit default swap for US government debt (i.e. the cost to insure it) rise to a record high – far beyond its 2008 peak.
China’s PMI’s (official and private surveys) mostly disappointed and suggest its reopening has lost momentum.
Mixed employment data from the US muddied the monetary-policy waters, with a very strong ADP print and higher initial claims report. As of Q1, there were 3 times as many inflows into employment from people “not in the labor force” as there were from people classified as “unemployed.” That’s a highly cyclical ratio. Basically, it suggests the unemployment rate is an increasingly bad indicator of "available labor supply."
But first, a message from today's sponsor: Wander
Invest in these vacation rentals in a few clicks ☝
With Wander.com, you can unlock access to vacation rental investing without the hassle and headache of doing it yourself.
Wander REIT is the first and only institutional-grade vacation rental investment product. That means investors get all the tax-advantaged benefits of a REIT in a new asset category: vacation home rentals. Instead of the traditional apartment or office-building REITs, Wander REIT invests in the best of the best of vacation rentals.
Enjoy targeted 8% dividends and a 14% targeted total return with appreciation from hand-picked, stunning vacation homes – starting with a $2,500 minimum – without having to buy a property, change light bulbs or deal with guests. And for a limited time, new REIT investors may get an opportunity to invest in Wander’s next round of funding.
Bullish & Bearish
↓ S&P 500: Keep an eye on the 4200 level — 4,000 is the bull safety net.
↑ Oil: WTI climbed toward $72 a barrel after falling by 7.1% last week.
↑ Money-Markets: European managers rebranded ~$1T of funds as ESG.
↓ Currencies: Turkey looks to prevent parallel exchange rate with its lira at risk.
↓ ESG: An underground tangle of wires is dragging Germany’s $1T green push.
↑ Crypto: Traders hope the CPI will finally be the boost to get Bitcoin above its $30k level.
↑ Meme Coins: PEPE continues to provide some needed liquidity into markets, with some particularly sage investors predicting it will hit $4.20B market cap by next week.
Week Ahead: Signal to Noise
Next week’s market outlook and whether you should actually care.
Signals
US Inflation (Wednesday, May 10)
City Index
Markets open the week as hopeful as an intern on their first week, as investors await Wednesday’s consumer price index (CPI) for April. Economists predict a 5% increase compared to the same month last year, consistent with March's figures.
Core CPI, which excludes volatile food and energy prices, is expected to rise by 5.4%. This would be slightly lower than the previous month. While both core and headline inflation are below the peak levels observed last year, they’re still surpassing the Fed’s target of 2%.
The Fed is still playing hardball with inflation. During its last meeting, the Fed remained largely unchanged in its stance as it confirmed a hike in interest rates. It essentially copy-pasted its sentiment from previous meetings.
For those of you desperate for drama, a significant inflation reading on Wednesday could unsettle those bearish on the dollar. Specifically, service-related inflation, excluding energy, may remain stubbornly high. In any case, inflation will continue to be a critical data point for traders and the one of two things that keep J Pow awake at night (see last newsletter for the other).
US Debt Ceiling
Ecoinometrics
J Pow got one too many questions last week in the FOMC press conference about the debt ceiling, and the politicos want their spotlight back. It’s a responsibility Fed Chair Powell has about as much say and interest in as your MD has in your pickleball hobby.
Just under a month before the earliest possible chance of a US default (June 1st), the Twitter fear-baiters have found a new personality trait. Renewed concerns of a US default and regional banking crisis are rearing their heads again. They’re two key themes traders will be watching, given their ability to make or break sentiment for global assets with ease.
Regional banks’ current outflow of deposits was about as expected as Elizabeth Holmes going through yet another character rebrand. CEOs are now, unsurprisingly, requesting additional protection for deposits.
Adding to those concerns is the heightened fear that the US government might actually default on its debt. The main evidence came at the end of last week, when 1-year credit default swaps for government debt reached an all-time high. That includes 2008.
So, don't expect these themes to vanish so easily. They’re the two predominant factors deteriorating consumer sentiment at the moment. This could continue to limit gains in the stock market index. Other traders are waiting for a sharp decline in oil prices to hit. Gold trading may also become more erratic as it hovers around its highest recorded level.
China CPI & PPI (Thursday, May 11)
City Index
China's GDP growth target in 2023 of 5% is only receiving side-eyes, with increased murmurs that its economic reopening isn’t as robust as anticipated. Data from the National Bureau of Statistics China (NBS) indicates that the Purchasing Managers' Index (PMI) reached its peak in the first quarter. It raises concerns about weak growth in the second quarter and beyond.
Investors will likely keep a close eye on new loan growth, despite it reaching a record high in April. It’s a leading indicator to assess if domestic demand can sufficiently compensate for the growth slowdown. China’s trade balance data drops today, which will be scrutinized to determine if the surge in exports can be sustained. At this point, increasing exports will need to be the goal instead of just sustaining them, in order to get anywhere close to China’s 5% GDP target.
BOE Rate Decision (Thursday, May 11)
Bloomberg
The British are arriving fashionably late to the central bank brodown, with the BOE expected to hike by another 25 bps this Thursday. That would raise rates to 4.75%. The BOE (Bank of England) hiked in March at the same rate – but it wasn’t unanimous (7-2). Watch for statements from Governor Bailey specifically, who has warned that he was not sure the last hike would be the peak rate.
Goldman (Sachs, for those of you trapped in Dimon’s JP marketing algorithm) has upwardly revised its peak rate to 5%. This would leave room for another hike, if so. Investors will keep a close eye on how the MPC votes to see if fewer than 7 members vote in favor of a hike. Groundbreaking: less unanimity means confidence in future hikes is wavering.
Last week, the BOE’s Broadbent said there are signs that price pressures are easing. This indicates the UK is experiencing a second-round inflation effect – but not a wage spiral. In other words, the central bank claims that even if they’d began hiking six months sooner, it would have only shaved 0.5% off of its peak rate. Looks like even though they’ve ghosted the EU, they’re still trying to protect their long summers avoiding work.
Australian Budget (Tuesday, May 9)
Reuters
Australia has the (dis)pleasure of a federal budget to contend with this week. Australia’s Prime Minister recently said that bringing down inflation was a key goal in Tuesday’s budget. Unemployment is currently at 50-year lows, but commodity prices are at substantial highs. This mix has helped improve Australia’s budget position over the past year.
Aussie Treasurer Chalmer faces a tough dual task of trying to ease costs of living whilst taming inflation. Chalmers is expected to release a statement on “Measuring What Matters” today. Some hope that will provide clues on longer term policy shifts and future budgets’ priorities. But if you’ve learned anything after suffering from hearing the word “transitory” daily for over a year, you should know by now not to expect too much from speeches.
Though Australia’s March figures indicate an underlying cash surplus, Goldman Sachs (among others) expects this surplus to be short lived. It’s likely to see Australia target cost-of-living support (such as energy relief), increased benefits for those over 55 and single parents.
A surprise hike by the Reserve Bank of Australia (RBA) – which few foresaw – meant that three major central banks tightened by 25 bps last week. Meanwhile, central bank watchers will keep a close eye on inflation expectations released by the RBNZ.
Noise
Monday, May 8:
UK: Public holiday
US: Employment Trends Index (ETI); Wholesale trade; Survey of Consumer Expectations; Oil Price Dynamics Report
EU: Sentix Investor Confidence; German Industrial Production
Japan: BOJ releases monetary policy minutes
Australia: Building approvals
Tuesday, May 9:
US: NFIB Small Business Optimism Index; API's Weekly Statistical Bulletin (WSB)
EU: French trade balance
China: Trade balance
Japan: Household spending
Australia: NAB business conditions; Westpac Consumer Sentiment
New Zealand: Electronic card transactions
Wednesday, May 10:
US: NY Fed John Williams speaks
Canada: Building permits
EU: German CPI
Japan: Indexes of Business Conditions; Foreign Reserves; Coincident Index
New Zealand: Food price index
Thursday, May 11:
US: Initial jobless claims; Producer prices; Weekly Economic Index
Japan: BOJ release summary of opinions; Foreign investment
Australia: Weekly payroll, jobs and wages report; Monthly Business Turnover Indicator
New Zealand: Finance Minister speaks
Other: OPEC Monthly Report
Friday, May 12:
US: Michigan Consumer Survey; Imports and exports; Survey of Professional Forecasters; SCE Household Spending, Fed’s Bullard and Jefferson speak
EU: French CPI
UK: BOE Pill and Shortall speak; GDP; Industrial/Manufacturing output; Trade balance
New Zealand: Inflation expectations; Services PMI; Finance Minister pre-budget speech; International migration
Lit's Picks
Macro watch this week.
A top Greater China fund is joining Warren Buffett in voicing concerns over Taiwan’s semiconductors (BBG)
Edtech is looking like the hottest category for AI, with apps like Cramly, Caktus or PicSolve now surging in as much popularity as ChatGPT (Accelerated)
Meme Bank
What'd you think of today's Eight Ball? |