Hot NFP sees traders pare Fed rate cut bets ahead of CPI and FOMC - Newsquawk US Market Wrap

• SNAPSHOT: Equities flat/down, Treasuries down, Crude flat/down, Dollar up
• REAR VIEW: Hot US jobs report; Soft Canada jobs report; Plethora of ECB speak; Putin mentions Ukraine peace; More BoJ sources on scaling back JGB purchases; China trade surplus widens; GME share sale, RoaringKitty does little to stop the downside.
• WEEK AHEAD: Highlights include US CPI, FOMC, BoJ and China inflation. To download the report, please see Newsquawk.
• CENTRAL BANK WEEKLY: Previewing FOMC, BoJ; Reviewing ECB, BoC, RBI. To download the report, please see Newsquawk.

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MARKET WRAP

Stocks were ultimately flat aside from the Russell with the major indices seeing weakness in response to the hot NFP report, which also heavily weighed on bonds and gave a rally to the Dollar. Stocks had clawed back losses on the economic growth prospects in response to the solid labour market report (note both Atlanta Fed and NY Fed raised their GDP tracking estimates), offsetting some fears of a softening labour market. The hot report however does give the Fed more time to be patient before lowering rates, which saw T-notes tumble across the curve with the front-end and belly underperforming. Money markets now only fully price just one rate cut by year-end, vs 2 rate cuts priced pre-data; there is still around 50% probability of two cuts in 2024. The hot jobs report set the tone of trade for the day while crude prices ultimately settled flat to slightly lower with some remarks regarding the increased supply from Russian deputy PM Novak and comments on Ukraine Peace talks from President Putin kept the crude complex offered, as did the surging buck. Antipodes were the FX laggards although metal prices also took a beating in response to the higher yields in the US. Attention now turns to the US CPI and FOMC with accompanying dot plots on Wednesday.

US

NFP: Within the establishment survey, headline NFP was hotter than all analyst forecasts at 272k, rising from April's (revised down) 165k, printing above the 185k consensus; note, the most optimistic forecast was for 258k. There was a huge jump in private payrolls to 229k, above the 170k forecast and prior 158k. The wage metrics were also hot, rising to 4.1% Y/Y from an upwardly revised 4.0%, above the 3.9% forecast, with M/M earnings rising 0.4% above the 0.3% forecast and prior. Within the household survey, the unemployment rate ticked up to 4.0% from 3.9%, despite expectations for this to be unchanged. However, this was likely due to a decent drop in the participation rate, falling to 62.5% from 62.7%. Aside from the unemployment rate (which can be somewhat looked through given the drop in participation), the jobs report was very hot with both NFP and wages coming in above expectations, adding to inflationary concerns. The hot labour market report is at odds with some of the softer reports we have seen recently (falling JOLTS, rising jobless claims, soft ADP), and therefore this gives the Fed extra time to keep rates on hold whilst they assess if inflation returning to target in a sustainable manner. Attention turns heavily to next week's US CPI report to see if inflation progress is returning, stalling, or moving in the wrong direction. The US Fed and Dot Plots post CPI will also be key. Note, Fed Chair Powell has said before that the Fed would be prepared to act if there was an unexpected weakening of the labour market, but the May NFP report shows anything but a weakening. Nonetheless, analysts are concerned of a slowdown in the jobs market ahead - Pantheon Macroeconomics suggest that most indicators point to a summer slowdown. Markets now price in just 40bps of easing by year-end, vs 50bps pre data.

FIXED INCOME

T-NOTE FUTURES (U4) SETTLE 1 POINT 1+ TICK LOWER AT 109-10

T-notes tumble after hot NFP sees traders pare Fed rate cut bets. At settlement, 2s +15.6bps at 4.876%, 3s +16.1bps at 4.660%, 5s +16.2bps at 4.454%, 7s +16.1bps at 4.442%, 10s +14.7bps at 4.428%, 20s +12.8bps at 4.639%, 30s +11.6bps at 4.546%

INFLATION BREAKEVENS: 5yr BEI +1.4bps at 2.292%, 10yr BEI +1.9bps at 2.307%, 30yr BEI +1.7bps at 2.316%.

THE DAY: T-Notes meandered in anticipation of the NFP print which ultimately knee jerked higher, likely as algos reacted to the rise in the unemployment rate before almost immediately paring as the full report was digested, which was on net much hotter than expected. It is also worth highlighting the upside in the unemployment rate was accompanied by a drop in the participation rate. NFP came in above all analyst forecasts and wages were also hotter than expected, which set the trading tone for the rest of the day with a hot report showing that the Fed can afford to be more patient whilst they assess that inflation is going to return to target. Also, the hotter than expected jobs and wages may also have inflationary implications themselves, which may see the Fed opt to take an even more cautious approach. Money markets responded hawkishly with just 38bps of easing now priced by year-end (vs 48bps priced before the release), with traders paring their bets for two rate cuts in 2024. There was little else of note aside from NFP today with attention turning to next week's CPI and FOMC on Wednesday, as well as 3-, 10- and 30-yr supply.

NEXT WEEK'S SUPPLY: US to sell USD 58bln 3yr (vs. exp. USD 58bln), USD 39bln 10yr (vs. exp. USD 39bln), USD 22bln 30yr (vs. exp. USD 22bln) all to settle on June 17th.

STIRS

• Market Implied Fed Rate Cut Pricing: September 14bps (prev. 21bps D/D), November 21bps (prev. 31bps), December 38bps (prev. 50bps).
• NY Fed RRP op demand at USD 396bln (prev. 378bln) across 69 counterparties (prev. 72)
• SOFR at 5.33% (prev. 5.33%), volumes at USD 2.008tln (prev. 1.989tln).
• EFFR at 5.33% (prev. 5.33%), volumes at USD 105bln (prev. 105bln).

CRUDE

WTI (N4) FUTURES SETTLE 0.03 LOWER AT USD 75.53/BBL; BRENT (Q4) FUTURES SETTLE USD 0.25 LOWER AT USD 79.62/BBL

Crude prices ultimately settled flat/lower, with the hot NFP initially weighing on crude as the Dollar surged. However, as risk appetite recovered crude prices pushed to session highs, before those gains were pared after remarks from the Russian Deputy PM Novak and Russian President Putin. Novak said that oil supply should be increased in order to ensure balance but noted that demand for oil will increase by more than 1mln BPD/yr in the next 10 years. Novak also spoke earlier on its oil pipeline project, noting it could be built alongside the Power of Siberia gas pipeline to China, and that its planned capacity is seen at 30mln tonnes per annum, but the project is still in initial phases. Also weighing on crude, was Russian President Putin, who stated that there is a possibility for Ukraine peace talks. Elsewhere, there was little sustained reaction to China's crude oil imports rising in May although YTD crude oil imports in China were down 0.4% Y/Y. In the US, the DoE is seeking 6mln more bbls for the SPR, while the Baker Hughes Rig Count data saw oil rigs fall by 4 to 492, natgas rigs declined by 2 to 98, leaving the total -6 at 594.

EQUITIES

CLOSES: SPX -0.08% at 5,347, NDX -0.11% at 19,001, DJI -0.22% at 38,799, RUT -1.12% at 2,027.

SECTORS: Utilities -1.09%, Materials -1.01%, Real Estate -0.86%, Communication Services -0.81%, Consumer Staples -0.60%, Energy -0.47%, Consumer Discretionary -0.43%, Industrials +0.10%, Health +0.11%, Technology +0.20%, Financials +0.35%.

EUROPEAN CLOSES: DAX: -0.52% at 18,426, CAC 40: -0.48% at 7,943, PSI: -1.13% at 6,709, FTSE 250: -0.77% at 20,515, FTSE 100: -0.48% at 8,210, IBEX 35: -0.34% at 11,351, FTSE MIB: -0.50% at 34,461, SMI: +0.15% at 12,209, Euro Stoxx 50: -0.34% at 5,018.

• APPLE (AAPL) WWDC PRIMER: Apple's WWDC event will take place on Monday 10th June at 18:00 BST /13:00 EDT. Apple is widely expected to launch new AI features at the event. There will also be attention on the new iOS 18 and iPadOS 18 updates. Recent WSJ source reports have suggested that Apple will be announcing a slew of generative AI upgrades to its software products, including Siri, which will include assistance in message writing, photo editing and summarizing texts. Others also are expecting an update to Safari and Notes but with more AI, as well as texts, email, AI emojis, voice memos and more. The WSJ sources also noted that Apple is also expected to unveil one or more potential partnerships with major AI developers after holding talks with OpenAI, Google and Cohere. The WSJ article also points out that Apple has secured fewer chips that are essential for training AI models vs its rivals. Participants will also be watching to see if they announce any deals with other chip companies to help them expand their AI offerings. Techcrunch also highlights that Apple is said to be powering some of its new AI features with its Ajax LLM. Other reports indicate that Apple plans to process data from AI in a way that even employees won’t be able to access, which would help Apple continue to deliver on its promise of data privacy for its users.

STOCK SPECIFICS

• Samsara Inc. (IOT) earnings missed profit expectations.
• DocuSign (DOCU) FY25 revenue guidance disappointed but it did boost its buyback programme by USD 1bln.
• Microsoft (MSFT): The FTC has sent civil subpoenas to MSFT as it opens an antitrust probe of MSFT’s Inflection AI deal, with the FTC wanting to know about the purpose of their partnership and how it came to fruition, according to WSJ.
• Nvidia (NVDA) outstanding short bets stand at c. USD 34bln, nearly twice as much as what has been bet against Apple (AAPL) and Tesla (TSLA), according to S3 Partners cited by Reuters.
• GameStop (GME) announced plans to sell up to USD 75mln shares after the rally on Thursday, as well as reporting a Q1 earnings and revenue miss. RoaringKitty live stream added little new.
• Regional Banks (FRME, FNB, FULT, ONB, PGC, WAFD) - Moody's placed ratings of these six U.S regional banks on review for downgrade on Thursday due to their substantial exposure to commercial real estate (CRE) loans.
• Lockheed Martin (LMT): Germany is looking into buying eight additional F-35 jets, according to Reuters sources.
• Lyft (LYFT): CEO said Lyft has more drivers on the platform now than at any other time in the company’s history in an interview on CNBC. Stock received upgrades from Morgan Stanley and BofA.
• Google (GOOGL): Persuaded a federal judge in San Francisco on Thursday to dismiss a proposed class action over its alleged misuse of personal and copyrighted data to train AI systems including its chatbot Bard.
• Walgreens (WBA): Reportedly shelves plans for a Boots IPO as sale talks continue, according to Bloomberg.
• PowerSchool (PWSC): To be acquired by Bain Capital in a USD 5.6bln transaction, or USD 22.80/shr in cash.
• Autos (GM, F, TSLA): US is finalizing vehicle fuel economy rules through 2031 that are less stringent than what the Biden Administration originally proposed, via NHTSA. General Motors (GM) faces USD 906mln in forecasted US Fuel Economy civil penalties through 2031, down from USD 6.5bln under the 2023 proposal.
• Kroger (KR) Health's The Little Clinic is announces that patients will be able to explore medical treatment, including GLP-1s such as Wegovy, Zepbound and others as part of their weight loss journey.

US FX WRAP

The Dollar rallied on Friday after a super-hot May NFP report, which saw the headline come in above all analyst forecasts at 272k, while wages were also hotter than forecast. The data set the tone of trade throughout FX for the day with DXY rising to a peak of 104.91 from a low of 103.99.

The Dollar strength took many FX pairs through key levels with EUR/USD falling from 1.09 to c. 1.08, while USD/JPY briefly reclaimed 157.00 before paring somewhat. The Swissy meanwhile saw notable weakness on account of the prospects of a more hawkish Fed vs a dovish SNB who have already cut rates. Meanwhile, Gold prices tumbled to test USD 2,300/oz as US yields surged in response to the data, adding to the earlier weakness in the yellow metal after China maintained its gold reserves after 18 months of consecutive purchases.

Cyclical currencies tumbled on account of the Dollar strength with Aussie and Kiwi underperforming on the session with a drop in China imports likely adding to the pressure. Nonetheless, equity prices managed to stage a turn-around from the initial weakness with equities seemingly trading off a "good news is good news" theme. Other cyclicals, like the CAD and GBP were relative outperformers ex the buck, USD/CAD extended further above 1.3700 after the BoC on Wednesday with today's jobs report only adding to CAD woes, but the sharp drop in full time jobs likely supports the BoC's cut earlier in the week. EUR/GBP fell sub 0.8500.

CNH was relatively flat vs the rampant Dollar with perhaps the wider China trade surplus keeping the currency buoyed.

Aside from the NFP, there are a few things worth noting: for the Yen, the BoJ Policy meeting is due next week and more reports signalling the BoJ is to consider whether to scale back its bond purchases.

For the Euro there was plenty of ECB speak in wake of the policy announcement on Thursday; Kazaks said any further cuts should be gradual, Holzmann confirmed source reports he voted to keep rates unchanged due to recent data, with both the hawks noting the fight against inflation is not over yet. Muller said the ECB needs to be cautious, Nagel and Vasle said the ECB is not on auto pilot/pre-set path. Makhlouf said he is unsure how fast the ECB will carry on with reductions, or if at all. Centeno also said there is no commitment on the rate trajectory. Meanwhile, the latest ECB Q1 Key wage indicator rose to 5.1% from 4.9% in Q4.

EMFX largely traded to the tune of the Dollar post NFP, but MXN was a clear laggard after reports on Thursday that the Morena leader in Congress has confirmed the 18 constitutional reforms proposed by AMLO will be voted on in September under the new configuration of Congress. Note, Mexico’s May inflation states were also slightly softer than forecast. CLP also saw notable weakness with the weakness in copper post NFP weighing alongside the rising Dollar, with hotter than expected inflation doing little to save the CLP. INR was unreactive to the RBI that maintained its Repo Rate and policy stance as expected. BRL only saw mild weakness with a hotter than forecast IGP-DI Inflation Index limiting the losses, while Galipolo was reiterating concerns with un-anchoring inflation expectations. However, in late trade BRL saw weakness as Brazil Finance Minister Haddad said they may have to make more budget blocks this year, which also saw Brazilian debt tumble.