A Day Ahead View in US and Global Markets by Mike Dolan
And then there was one.
In an extraordinary turnaround in just five months, financial markets are now pricing in just a quarter-point interest rate cut from the Federal Reserve this year – compared to the six cuts built into futures prices in early 2024.
The good news is that this is largely due to the strength of the ongoing US expansion – the bad news is that this strength makes it harder for the Fed to see inflation reach its target and keeps it hesitant about a first rate cut. .
Thursday’s reversal of fortunes on Wall St reflected all of this clearly, with surprisingly strong business and job market updates seeding the worst day of the month for the S&P500, despite Nvidia’s nearly 10% rise in another earnings report. Explosive profits infused by the artificial intelligence boom.
Although the broader technology sector ended the day higher, the other 10 main stock sectors were in the red. And the equal-weighted S&P500 lost 1.4%.
Fed fears 1 – AI 0.
With just 35 basis points of Fed easing now priced in for the year, two-year Treasury yields have risen again to within 4 basis points of the 5% threshold. The dollar returned to its best level since mid-May and this, in turn, triggered a reversal in high gold prices – recording its worst day of the month and worst week of the year.
The VIX has recovered more than a point from pre-pandemic lows.
The so-called “flattening” of the yield curve has caused the inversion of the 2- to 10-year yield differential to deepen to its most negative level this year – with yields in both tenures rising, but interest rates short went up more.
The yield curve has been inverted for nearly two years and its reliability as a harbinger of recession has been ripped to shreds – underscoring the peculiarity of this particular cycle and how the Fed may be struggling to cool it.
Ahead of the US Memorial Day holiday on Monday, all major price indicators pulled back somewhat from Thursday’s moves – with S&P futures up 0.2% before the bell and Treasury yields and the dollar falling a little.
But Fed rate jitters reverberated around the world overnight, with stocks in Tokyo, Seoul, Hong Kong and Shanghai losing more than 1% on Friday.
China’s ongoing military exercises around Taiwan have not helped investor confidence.
Europe’s two-day loss continued – with regional interest rates and political concerns of its own.
While the European Central Bank is still committed to delivering its first rate cut next month, unexpected strength in May’s business readings and a surprising acceleration in wage deals negotiated in the first quarter have dragged down market pricing for the ECB for the year. whole, slowing down to less than 60 bp. .
The reassessment of the Bank of England’s trajectory this week was even more dramatic as sticky UK inflation readings combined with news of a snap election on July 4.
Although Friday’s data showed that UK retail sales fell much more than predicted last month, money markets have eliminated the chances of a BoE cut next month and now only see a chance of 1 on 3 of a change in August.
Sterling, whose broader trade-weighted index is back to 8-year highs, pre-Brexit referendum levels, recovered some of Thursday’s losses against the dollar.
Elsewhere, investors monitored the G7 financial meeting in Italy and a speech on Friday by Fed Governor Chris Waller in Iceland.
In corporate news, a 7.55% drop in Boeing on Thursday, after the U.S. planemaker forecast negative free cash flow in 2024, was responsible for more than 90 points to the downside of the blue index. Dow Jones chip.
Ticketmaster owner Live Nation fell nearly 8% after the U.S. Department of Justice, along with a group of 30 states and the District of Columbia, filed suit Thursday to break up the concert promoter.
In Europe on Friday, Renault shares rose 4% after the French carmaker announced a share buyback plan. And Britain’s National Grid recovered almost all of Thursday’s 10% drop in plans to raise about 7 billion pounds ($8.9 billion) in a rights issue.
Abrdn shares fell after the UK fund manager’s CEO, Stephen Bird, stepped down.
Top daily items that could guide US markets later on Friday:
* U.S. durable goods orders in April, final reading from University of Michigan May household survey
* G7 finance ministers and central bank governors meet in Stresa, Italy
* Federal Reserve Governor Christopher Waller speaks
* US Corporate Profits: Workday
(Reporting by Mike Dolan, Editing by Nick Macfie mike.dolan@thomsonreuters.com)
