Hot PCE sees marked hawkish re-pricing, stocks rally anyway - Newsquawk US Market Wrap

SNAPSHOT: Equities up, Treasuries mixed, Crude up, Dollar flat
REAR VIEW: Hot US PCE; Strong Durable Goods headline; Final UoM inflation expectations revised lower, sentiment revised up; Debt ceiling talks progressing, but not there yet; Mester notes everything is on the table for June; Russia leaning towards leaving oil output unchanged; Baker Hughes Rig Count falls; Strong MRVL earnings & optimistic about AI future.
WEEK AHEAD PREVIEW: Highlights include US jobs report, US ISM; China PMI; inflation data from EZ and AUS. To download the report, please click here.
CENTRAL BANKS WEEKLY: Previewing ECB and CBRT minutes; reviewing FOMC, RBNZ, PBoC, BoK, SARB. To download the report, please click here.
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MARKET WRAP

Stocks grinded higher on Friday heading into the long Memorial Day weekend albeit it is worth noting futures volume was at the lowest seen this week given the recommended early closure. The large-cap Tech, Consumer Discretionary and Communication names did a lot of heavy lifting with NDX surging 2.6% while the SPX saw gains of c. 1.3%. Helping the NDX outperformance was the continued strength post-NVDA on Thursday, but also after strong earnings from Marvell (MRVL) Thursday night, buoying the semi sector overall. On the debt ceiling, there was some optimism, albeit a deal is still yet to be reached but there was some clear progress on Thursday evening, but sticking points remain and there has been little progress since. The stock rally appeared to look through the hotter-than-expected PCE report which also resulted in a marked hawkish re-pricing with money markets now looking for an over 60% probability of a 25bp hike in June while just 6bps of cuts are being priced in through year-end. The repricing led to pronounced curve flattening. The data helped bring the dollar index off lows but DXY was unchanged on Friday and remained above 104 while EUR/USD kept its head above 1.07 and USD/JPY rose above 140. The crude complex was firmer on Friday to settle in the black for the second consecutive week amid much lighter daily volume ahead of the long weekend.

US

FED: Mester (non-voter) said the PCE data on Friday confirms inflation is still too high and it underscores slow progress and suggests the Fed has more work to do. On the June meeting, she noted everything is on the table but she may have to revise up her inflation forecasts although she will not prejudge the outcome, noting there is still more data ahead of the June FOMC. She also added her path for the funds rate is to raise and hold there for some time. She noted prior rate hikes will affect the economy going forward, and tighter policy is still feeding into the economy and she still supports an FFR of over 5%. Mester added she has not seen much sign that banking stress is affecting credit conditions, but the focus right now is on tightening credit standards, although she does not know exactly how tight policy is right now, it is important the Fed does not undertighten. She also suggested she considers herself an "owl", not a hawk or a dove. On the economy, she said it has slowed quite a bit relative to last year, but it is still resilient.

DEBT CEILING: Heading into the memorial day holiday, the Republicans and the White House appear to be coming closer to a deal, albeit the primary progress was seen Thursday evening. Reports via Politico suggest the two sides have all but finalized the spending portion of discussions. Meanwhile, an official said President Biden and House Speaker McCarthy are near a deal that would raise the debt ceiling for two years and cap spending on most items, other than military and veterans. The official added Biden and Democrats are considering scaling back a boost in IRS funding as part of a budget deal. Given it is a Memorial Day holiday, reports suggest negotiators will be staying in the Capitol to get a deal done over the weekend ahead of the June 1st X-Date. A WH official said a deal is possible on Friday, but it could easily slip into the weekend. However, GOP negotiator Graves said the WH has expressed strong concerns about Medicaid in the talks, warning they continue to have major issues that they have not bridged the gap on and slams Dems for not accepting more work requirements, according to Punchbowl; said “Hell no” he won’t drop these demands in a final deal. GOP negotiator McHenry said that there has been progress in talks, but it becomes more difficult as progress is made. McHenry added a deal needs to be made in the next day, or two, or three.

DATA

PCE: The PCE data was hot. Core PCE rose 0.4% M/M, above the expected 0.3% and accelerating from the prior 0.3%, while the Y/Y accelerated to 4.7% from 4.6%, despite expectations for another 4.6% print. The headline rose 0.4% from 0.1% M/M and the Y/Y rose to 4.4% from 4.2%. The hot inflation prints will be key for the Fed's June decision, with recent commentary leaning towards a "skip" but with an option to hike if necessary. The acceleration of the Fed's preferred gauge of CPI will help the case for the hawks, and money markets are now looking at a near 60% probability of a 25bps hike in June. There is still more data to digest between now and the June 14th FOMC, including next week's NFP, and the May CPI and PPI data on the 13th and 14th June, respectively with the CPI and PPI within the FOMC blackout period. Personal income rose 0.4% from 0.3%, in line with expectations while consumption rose 0.8%, above expectations of 0.4% while the prior was revised down to -0.1% from 0.0%. Real consumer spending rose 0.5% vs 0.3% expected. Analysts at ING write this will inevitably lead to upward revisions of Q2 GDP expectations given the large weighting of consumer spending within the GDP report.

DURABLE GOODS: Durable goods orders in April rose 1.1%, better than the expected fall of 1.0%, albeit not as pronounced as March's +3.3%. The majority of the increase was a result of the defense aircraft sector, which is notoriously volatile. Nonetheless, orders for nondefense capital goods ex-aircraft were also stronger than expected, rising 1.4% (exp. -0.2%). Wrightson's strats note, "While somewhat encouraging, the April strength still leaves the annualized three-month growth rate for core shipments at just 1.2%, versus 2.3% growth for Q1 as a whole." The desk adds, "Business investment in equipment subtracted 0.4 percentage points from GDP growth last quarter and is still on track to be a drag on growth in Q2."

UOM FINAL: The headline was revised higher to 59.2 from 57.7 but fell from April to a five-month low highlighting continued consumer fears regarding the economy. The revision higher was supported by both current conditions and forward-looking expectations being revised up to to 64.9 (prev. 64.5) and 55.4 (prev. 53.4), respectively. However, both had fallen since April. The decline was driven by recession worries, but uncertainty around the debt ceiling probably weighed too. Oxford Economics adds, “During the 2011 debt ceiling crisis, sentiment fell sharply as the debt ceiling x-date approached, though back then equity prices suffered sharper falls than they have this time around. Back then, it took around six months for sentiment to rebound.” Meanwhile, The inflation gauges were encouragingly revised lower, albeit remaining elevated, with the short term 1yr ahead falling to 4.2% (prev. 4.5%) and the longer-term 5-10yr dropping slightly to 3.1% (prev. 3.2%).

FIXED INCOME

T-NOTE (M3) FUTURES SETTLED 7 TICKS LOWER AT 112-13; JUNE-SEP ROLL 90% COMPLETE

Treasuries flattened as hot PCE data ramps hawkish Fed pricing further as traders continue to fade debt limit angst. At (early) settlement, 2s +5.8bps at 4.568%, 3s +5.6bps at 4.246%, 5s +3.9bps at 3.936%, 7s +2.0bps at 3.879%, 10s -0.3bps at 3.812%, 20s -1.4bps at 4.152%, 30s -3.4bps at 3.970%.

INFLATION BREAKEVENS: 5yr BEI +1.1bps at 2.196%, 10yr BEI -0.3bps at 2.268%, 30yr BEI -1.0bps at 2.326%.

TOKYO/LONDON: After Thursday's bear-flattening on debt ceiling progress and strong data, the selling extended into the Tokyo morning, with T-Notes (M3) bottoming at 112-15+ in wake of Tokyo core CPI rising to 3.9% Y/Y in May, the fastest pace since 1982. Better buying developed on the back of Australian May retail sales missing to the downside, showing no growth M/M. The recovery was gradual through APAC but gained more meaningful momentum once the hot UK retail sales print entered the rear-view, with shorts-covering into the long weekend.

NEW YORK: The curve entered the US session with a flatter bias amid front end yields reluctant to retrace lower with the cash 2yr yield holding on to 4.50%. The above-forecast Core PCE and strong Durable Goods orders data saw knee-jerk bear-flattening flows. T-Notes found support at 112-09+. The final Uni of Michigan survey late in the NY morning saw both the 1yr and 5-10yr consumer inflation expectation gauges revised lower, seeing a wave of short-covering to take back USTs into pre-PCE ranges. However, better selling returned into the European close, accentuated by Fed's Mester (non-voter) on CNBC saying everything is on the table for the June meeting and expressing concerns over the PCE data. Goldman Sachs' Hatzius also said the data now makes the bank's on-hold call for June a close call. That flurry of hawkish sentiment saw T-Notes make fresh troughs at 112-05+ and the cash 2yr yield make a new peak at 4.64%, marking the eleventh consecutive D/D increase from c. 3.90% on May 12th. Ahead of the early settlement, a chunky 18.3k 5yr/8.4k Ultra 10yr Sept block flattener was seen in Sept. contracts. T-Notes settled off lows.

NEXT WEEK:

MON: US Memorial Day, UK Late May Bank Holiday.
TUE: Japanese Labour Market Report (Apr), EZ Sentiment Survey (May), Dallas Fed mfg. survey (May), Fed's Barkin.
WED: Japanese Retail Sales (Apr), Chinese Official PMIs (May), Australian CPI (Apr), French, Italian, German Prelim CPI (May), German Unemployment (May), Canadian GDP (Q1), Chicago PMI, JOLTS, Beige Book, Fed's Bowman, Collins, Harker, Jefferson.
THU: ECB Minutes, Chinese Final Caixin Manufacturing PMI (May), German Retail Sales (Apr), EZ/UK/US Final Manufacturing PMIs (May), EZ Flash CPI (May), US ADP National Employment (May), US Productivity, US ISM Manufacturing PMI (May), Fed's Harker.
FRI: US Labor Market Report (May).

STIRS:

SR3M3 +0.5bps at 94.6875, U3 -0.5bps at 94.78, Z3 -3.5bps at 95.045, H4 -7bps at 95.44, M4 -8.5bps at 95.86, U4 -8.5bps at 96.22, Z4 -7.5bps at 96.495, H5 -6.5bps at 96.66, M5 -6bps at 96.725, M6 -3.5bps at 96.725.
SOFR rises to 5.06% from 5.05%, with volumes surging to USD 1.537tln from 1.401tln amid market-based repo rates jumping higher into debt limit angst and GSE cash money withdraws.
NY Fed RRP op demand at USD 2.190tln (prev. 2.198tln) across 107 counterparties (prev. 106).
EFFR flat at 5.08%; volumes rise to USD 131bln from 126bln.

CRUDE

WTI (N3) SETTLED USD 0.84 HIGHER AT 72.67/BBL; BRENT (N3) SETTLED USD 0.69 HIGHER AT 76.95/BBL

The crude complex was firmer on Friday, albeit within contained ranges, to settle in the black for the second consecutive week amid much lighter daily volume ahead of the long Memorial Day weekend. Nonetheless, oil saw some optimism as US officials edge closer to striking a debt ceiling deal, although not there yet, but the gains were capped after further hot US data which has increased the likelihood of a 25bps June hike. Additionally, market participants will be awaiting the June 4th OPEC+ meeting where the latest rhetoric came via Russia. Reuters sources noted Russia is leaning towards leaving oil output unchanged ahead of the OPEC+ meeting, in fitting with recent commentary from Deputy PM Novak although he did slightly dial back these remarks on Thursday evening. Sources added further production cuts are unlikely and it was not in Russia's interests to reduce oil output right now.

BAKER HUGHES: In the week ending May 26th, Oil fell 5 to 570, Nat Gas down 4 to 137, leaving the total 9 lower at 711. In the last two weeks we have seen a nat gas reaction post-Baker Hughes and today made it 3 from 3, as Nat Gas futures rose in the couple of minutes after the metrics, albeit the move did pare. Note, US nat gas rig count was down 24 in May, the largest monthly decline since Jan 2016.

EQUITIES

CLOSES: SPX +1.3% at 4,205, NDX +2.58% at 14,298, DJIA +1.00% at 33,093, RUT +1.05% at 1,773.

SECTORS: Technology +2.68%, Consumer Discretionary +2.38%, Communication Services +1.71%, Real Estate +1.17%, Industrials +0.77%, Financials +0.74%, Materials +0.42%, Consumer Staples +0.35%, Utilities -0.1%, Health -0.17%, Energy -0.37%.

EUROPEAN CLOSES: Euro Stoxx 50 +1.59% at 4,337, FTSE 100 +0.74% at 7,627, DAX 40 +1.20% at 15,983, CAC 40 +1.24% at 7,319, FTSE MIB +1.16% at 26,713, IBEX 35 +0.82% at 9,191, SMI +0.96% at 11,433.

STOCK SPECIFICS: Marvell (MRVL) beat on EPS and revenue; expects revenue growth to accelerate in H2 ’23 with gross/operating margin expansion. On top of this, MRVL gave upbeat encouraging commentary for how AI will positively impact cos. revenue and citing AI as a “key growth driver”. Gap (GPS) posted a surprise profit with investors buoyed by its improved margins. Elsewhere, revenue was in line, with Q1 comp. sales -3%. Looking ahead, Q2 revenue is seen down in the mid to high-single-digit range and FY23 revenue down low to mid-single-digit range. Autodesk (ADSK) EPS printed in line while revenue beat. Q2 profit view was short but it lifted the FY outlook. Workday (WDAY) surpassed expectations on the top and bottom line with subscription revenue rising 20.1% Y/Y. Raised its FY subscription revenue outlook. Moreover, WDAY named Zane Rowe, VMWare (VMW) CFO, as its new CFO. Deckers (DECK) beat on the top and bottom line, although FY guidance was light. Ulta (ULTA) sank despite a decent report; it saw a marginal beats on EPS and revenue with comp. sales also improved more-than-expected. Looking ahead, it also affirmed FY guidance but lowered operating margin view. RH (RH) beat on EPS and revenue but next quarter revenue guidance was light as well as lowering the outlook for adj. operating margin. Exec expects the luxury housing market and the broader economy to remain challenging throughout FY23 and into the next year. Ford (F) CEO and Tesla (TSLA) CEO announced the two cos. had struck a deal where Ford drivers get access to 12k Tesla charging stations; will see F’s charging network in North America double. Lowe's (LOW) raised quarterly dividend 5% to USD 1.10/shr (prev. 1.05). Paramount Global (PARA) controlling shareholder National Amusements (NAI) has received a USD 125mln preferred equity investment from BDT Capital Partners. Francisco Partners and TPG (TPG) ended negotiations to acquire New Relic (NEWR), according to Reuters sources.

WEEKLY FX WRAP

DXY poised for a third straight week of gains as dovish Fed bets unwind ahead of the long weekend

DXY - DXY is on track to notch its third consecutive week of gains amidst rising hopes of a US debt ceiling resolution coupled with hawkish Fed repricing throughout the week, the latter on better-than-expected data rounded off by a hotter-than-expected PCE on Friday. To recap the latest data, US Core PCE Price Index rose 4.7% Y/Y vs. Exp. 4.6% (Prev. 4.6%). Fed pricing, upon the PCE release, knee-jerked to 60% implied for a June 25bps hike from sub-50% before the data, with cuts out the curve further unwinding. In contrast to the PCE, Final Michigan Survey saw long, and short-term inflation expectations revised down, although Fed pricing was little changed post-Michigan. Furthermore, the FOMC minutes this week offered little in the way of fresh meat on the bones and largely reflected recent Fed speak – which this week provided a range of views with hawks guiding higher terminal rates despite a potential standpat meeting in June. USD strength and new multi-month peaks for DXY, and the index looks to end the European week near 104.00 and within a 102.96-104.31 weekly band. Debt ceiling talks are expected to continue this weekend, whilst local press guided a potential vote for Tuesday evening – after the cash close amid the sensitivity of the event. Ahead, next week will see the US Memorial Day market holiday on Monday, whilst ISM Manufacturing and the US jobs report will be released at the latter end of the week.

EUR, GBP - The EUR was rattled by a winter recession in Germany raising risks of a Eurozone economic downturn as the ECB remains hawkish. ECB members this week underscored the concerns surrounding persistently high inflation. PMIs earlier in the week were at a multi-month low with pronounced manufacturing pressure accompanied by a sharp increase in service sector prices. ECB implications are hawkish. The release - which followed the French and German Flash metrics - saw the Manufacturing measures miss expectations while the Composite and Services figures were more mixed. Traders now look ahead to EZ Flash inflation due next week. Sterling gleaned some brief support from hotter-than-anticipated UK inflation metrics and perceptions that BoE will lift rates to loftier levels, whilst firmer-than-expected Retail Sales on Friday underpinned BoE pricing along with the British currency. Nonetheless, amid the aforementioned Dollar strength, EUR/USD and GBP/USD look to end the week softer in a 1.0707-0831 and 1.2308-2472. EUR/GBP is poised to close the European week flat in a 0.8648-8719 range.

AUD, NZD, CAD - Kiwi was hit hard early in the week as the RBNZ delivered a dovish hike of 25bps to 5.50%. The announcement was viewed as dovish as the central bank maintained the peak rate forecast at 5.50%, which signals the end of its hiking cycle, and also omitted its prior language regarding further rate increases. However, it noted that the OCR was set to remain restrictive for the foreseeable future. Furthermore, RBNZ Governor Orr said rates are restrictive and well above neutral, whilst economic growth and inflation are weaker than expected. The RBNZ added that the Central Bank can change its assessment if needed as new data emerges. NZD/USD slumped from a weekly peak of around 0.6300 to a weekly trough of 0.6040. Meanwhile, the Aussie was undermined by weakness in base metals and Yuan depreciation due to the deteriorating Chinese growth outlook and ongoing China-US spat. Add to that, the Aussie Retail Sales also printed softer than forecasts. AUD/USD looks to end the week towards the bottom of a 0.6490-6667 range ahead of the monthly Aussie CPI next week. Loonie lurched with oil on bearish supply/demand dynamics and looks to end the week above 1.3600 vs a 1.3484 weekly base.

JPY - Overall, another detrimental week for the JPY as it yielded to widening UST/JGB differentials as BoJ Governor Ueda stuck to the Central Bank’s ultra-easy monetary policy stance whilst Fed pricing tilted more hawkish. USD/JPY printed a base of 137.49 this week before edging higher and eventually topping 140.00 to the upside to a 140.32 high – levels last seen in November 2022, with the help of mostly-softer-than-expected Tokyo CPI – which acts as a precursor to the nationwide release a couple of weeks later. The Tokyo CPI showed headline and core cooling but super-core ticking higher, albeit matching expectations.

SEK - The SEK stands as the current G10 outperformer on Friday with strength seen amid hawkish commentary from Riksbank Deputy Governor Breman who suggested increasing asset sales is something the Bank could think about if we see the crown continuing to weaken. Albeit, this upside eased somewhat as Breman clarified it does not have to be at the next meeting.

EM - Lira was subdued throughout the week ahead of the Turkish election run-off as incumbent President Erdogan holds an advantage and is likely to maintain unorthodox policies. The CBRT opted to maintain its One-week Repo Rate at 8.50%, in line with market expectations, whilst also reiterating forward guidance; USD/TRY topped 20.00 on some charts. Analysts at ING said “The future of CBRT policy could largely reside with the outcome of the election run-offs – “whether the new administration after the second round of the presidential elections is to change/revise the new economy model will be a key issue for watchers of the Turkish economy”. Meanwhile, the South African Rand hit a record low regardless of a larger-than-expected half-point SARB rate increase as the Bank sees further ZAR declines and delivered a downbeat assessment of the South African economy. Finally, reports suggesting China's major state-owned banks were seen selling dollars in the onshore spot FX market helped halt the slide in the CNH and CNY along with some technical support via Fib retracement levels. Desks posit that a firmer Dollar and weak Chinese growth are affecting emerging market currencies like the ZAR, while the Israeli shekel has also been weaker than anticipated.