May is rescued by jump in unemployment, change in BoE and increase in HK

A Day Ahead View in US and Global Markets by Mike Dolan

World stock indices moved away from a month of doubts to return to 0.5% of historic highs, due to signs of a more flexible labor market in the USA, the fall in European interest rates and another increase in Hong Kong .

Wall Street’s wobble appears to be over, with the S&P 500 jumping to its highest close since April 1 on Thursday in an unexpected jump in weekly jobless claims that reignited expectations of Federal Reserve easing. And futures extended those gains before Friday’s bell.

The return of calm was evident in the decline in volatility indicators, with the VIX “fear index” closing on Thursday at its lowest level since January and the MOVE Treasury volatility index also falling to near 6-week lows.

With Fed futures now priced at 90% for a 25-point US interest rate cut by September and a decent 30-year Treasury auction completing a heavy week of new debt sales without much trouble, US yields Treasury fell.

San Francisco Fed Chief Mary Daly said Thursday she was still in “wait and see mode” but added: “We’ve had a stubborn three months of data, but I still see that monetary policy is working… I really think we’re seeing, in a really positive way, disinflation.”

The overall picture was also improved by Thursday’s indication from the Bank of England that its policymakers were changing course to join the European Central Bank in a likely first rate cut as early as next month – adding to the cuts already observed in Switzerland and Sweden this year.

With money markets now seeing a 50-50 probability of BoE action in June, UK 10-year government bond yields fell to their lowest level in a month on Friday.

It is encouraging for both the ECB and the BoE that the divergence from the Fed’s path has not significantly weakened either the euro or the pound sterling in the process.

The minutes of the most recent ECB meeting will be closely monitored later today.

The pan-European STOXX 600 rose nearly 1% on Friday to an all-time high, with Germany’s benchmark index also hitting a new record high.

The macro image is far from crystal clear, however.

Data released on Friday showed that Britain’s first-quarter economic growth rebounded stronger than many expected and that the closely watched real-time US GDP estimate is recording growth above 4% – despite the economic surprise indices being the most negative in more than a year.

But if disinflation resumes, the strong signs of growth and the better-than-expected first-quarter earnings season could well provide the perfect scenario for stock markets. The critical report on US consumer price inflation will be released next week.

The story continues

Elsewhere, Asian stocks were also boosted by the global scenario. Hong Kong’s Hang Seng rose more than 2% to 9-month highs and now has year-to-date gains of 11% – ahead of equivalent gains in the S&P500.

Bloomberg News reported that China is considering a proposal to exempt individual investors from paying taxes on dividends on Hong Kong shares purchased through the Stock Connect system.

Mainland Chinese stocks were more subdued despite this week’s upbeat April trade numbers, with deteriorating bilateral relations with Washington proving to be a headwind.

US President Joe Biden’s administration on Thursday added 37 Chinese entities to a trade restriction list, including some for allegedly supporting the spy balloon that flew over the United States last year.

And Biden is also expected to announce new tariffs on China as early as next week, targeting strategic sectors including electric vehicles, a source told Reuters.

Furthermore, the proportion of European companies that rank China as a top investment destination has reached an all-time low, a European business lobby group said on Friday.

Top daily items that could guide US markets later on Friday:

* Minutes of the European Central Bank meeting

*University of Michigan April Household Survey, April US Federal Budget; April employment report in Canada

* Federal Reserve Governor Michelle Bowman, Fed Vice Chair for Supervision Michael Barr, Dallas Fed President Lorie Logan and Minneapolis Fed Chief Neel Kashkari speak; Bank of England chief economist Huw Pill and BoE lawmaker Swati Dhingra speak

(Reporting by Mike Dolan, Editing by Christina Fincher, mike.dolan@thomsonreuters.com)