A Day Ahead View in US and Global Markets by Mike Dolan
May Day for Wall Street comes with the frightening prospect that the multiple interest rate cuts once expected by the Federal Reserve this year may now be just one – if any.
Facing another $1.1 trillion in new Treasury debt sales over the next two quarters, Tuesday’s shocking news that U.S. job cost growth accelerated during the first three months of the year was the latest blow for bond markets that were already struggling with an aggressive Fed.
With Wednesday’s Fed decision unlikely to offer much of a boost to rates, futures markets have cut easing expectations for 2024 to just 27 basis points (bps). A 25 percentage point cut will only be fully assessed at the central bank meeting on December 18th – well after the November elections.
Two-year Treasury yields surpassed 5% again on Tuesday, reaching their highest level of the year — just 32 basis points below the Fed’s current policy rate — and 10-year yields are back above 4.7 %. And exchange-traded funds that capture long-term Treasury bonds are posting losses of more than 10% in the first four months of the year.
With the Japanese yen still on the back foot despite Monday’s official intervention to support it, and the Swiss franc’s slide leading the way in Europe, the dollar index is near six-month highs. Bitcoin has plummeted to its lowest level in more than two months.
Navigating this week’s torrent of corporate earnings reports coupled with the turmoil in rates markets, Wall St stocks posted their worst day since January, with the S&P500 and Nasdaq posting monthly losses of more than 4%.
And stock futures remain in the red early on – even as megacap Amazon’s earnings beat after the bell on Tuesday did little to improve the broader mood even as its shares rose in after-hours trading.
And to add to the gloom was a failure by one of last year’s artificial intelligence darlings, Super Micro Computers, sending its shares down 14% after the bell. AMD’s AI chip sales forecast was also lower than expected and its shares also fell 7%.
Everything very negative? Some suggest that month-end trading on Tuesday and market holidays across much of Asia and continental Europe on Wednesday may have exaggerated the moves.
But it’s hard to escape the discomfort in the bond market.
Possible straws in the wind for inflation-conscious Treasuries include a pullback in U.S. crude oil prices to their lowest level in more than a month amid hopes for a ceasefire in Gaza and weakening Tuesday readings of US consumer confidence for April.
FOCUS ON POWELL
Furthermore, the employment cost hit in the first quarter may yet be surpassed by this week’s series of labor market updates in April – starting with ADP’s private sector payrolls update later today and culminating in the full national report on the job on Friday. Jobs data for March will also be released on Wednesday.
And while the Fed is unlikely to appear dovish on the outlook for the benchmark interest rate at Chairman Jerome Powell’s press conference later in the day, there is considerable focus in the Fed’s discussions on slowing the drawdown of Treasury bonds in its balance sheet.
In addition, the Treasury itself also publishes details of its quarterly reimbursement process with indications on the size of the auctions and due dates.
Another earnings-heavy daily for stocks will perhaps be overshadowed by the Fed meeting and bond market angst, and Apple is expected to release its report on Thursday.
With many major markets closed on Wednesday, the focus of overseas macro markets remains on the still-fragile yen and continues to probe 158 to the dollar – around 1.5% weaker than it was last Friday despite the Monday intervention at 160.
Japan’s ruling Liberal Democratic Party is examining the possibility of introducing measures to provide tax benefits to companies that convert foreign profits into yen, two senior party officials told Reuters. The tax exemption can be used as a political instrument to contain sharp declines in the yen, encouraging companies to return foreign profits to Japan.
Main daily items that could guide US markets later this Wednesday:
* Federal Reserve presents latest policy decision, statement and press conference
* April US ADP private sector payrolls, March JOLTS jobs data, April US ISM manufacturing survey, S&P Global late April manufacturing survey, March US construction spending
* US Corporate Profits: Pfizer, Kraft Heinz, MetLife, eBay, Qualcomm, Mastercard, Automatic Data Processing, Marriott, Dupont De Nemours, Global Payments, CVS, Marathon Oil, Mosaic, Eversource, Yum! Brands, ETSY, Estee Lauder, Albemarle, PPL, Paycom Software, Devon Energy, Generac, Aflac, Cognizant Technology, Ventas, Allstate, MGM Resorts etc.
*U.S. Treasury details quarterly repayment schedules and auction sizes
* Bank of Canada governor Tiff Macklem testifies to Senate committee
(Reporting by Mike Dolan, Editing by Alex Richardson mike.dolan@thomsonreuters.com)
