Stocks close green after UoM inflation expectations ease - Newsquawk US Market Wrap

• SNAPSHOT: Equities up, Treasuries flat, Crude up, Dollar down.
• REAR VIEW: UoM revised up from prelim, inflation expectations ease; Strong durable goods; Waller has not changed his view that the neutral rate is relatively low; Japan's Kanda said excessive FX moves are undesirable; Mixed Japanese inflation; Weak UK retail sales; TSLA to cut Model Y output at Shanghai plant; WDAY & INTU slump post earnings
• WEEK AHEAD: Inflation data from the US, Eurozone, Australia and Tokyo are the highlights. To download the report, please click here.
• CENTRAL BANK WEEKLY: Reviewing FOMC minutes, PBoC, RBA minutes, RBNZ, CBRT. To download the report, please click here.
• NOTE: Due to the Holidays in the UK & US; The service will be closed from the evening of Friday 24th May until 22:00BST on Monday 27th for the beginning of the APAC session.

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MARKET WRAP

Stocks closed green on Friday with outperformance in the Nasdaq with sectoral gains most seen in Communication and Tech names although most sectors closed green (ex health care) with broad-based gains (equal-weighted SPX +0.7%). Stocks generally were bid throughout the US afternoon with a rally ensuing from the better-than-expected UoM data which saw inflation expectations ease from the sharp gains seen in the prelim survey. Elsewhere, T-Notes were flat across the curve but with a slightly flatter bias. Note that Fed Governor Waller spoke on R*, noting he has not changed his view that the neutral rate is relatively low. The Dollar was lower in wake of the UoM data while the stronger-than-expected Durable Goods data ultimately had little impact. The Yen was flat vs the softer Dollar following mixed inflation data overnight and fresh jawboning from officials after USD/JPY rose above 157.00 on Thursday. The CAD outperformed on the weaker Buck, risk environment and higher oil prices, despite weak retail sales data. The upside in crude prices was buoyed by the aforementioned Greenback selling but it was not enough to pare the crude weakness seen throughout the week. Note that next week, US and UK markets are shut on Monday on account of Memorial Day in the US and Spring Bank holiday in the UK. However, it is an action packed week with focus on the US Core PCE data, the 2nd estimate of US GDP, and a plethora of Fed speak.

US

UOM: The Final UoM Consumer Sentiment survey for May saw headline Sentiment rise to 69.1, up from the prelim 67.4 with both current Conditions and forward-looking Expectations rising. Conditions rose to 69.6 from 68.8, while Expectations rose to 68.8 from 66.5. Although a welcome improvement from the preliminary survey earlier in the month, all three components still remain down M/M from April. The market highlight however was on the inflation expectations which saw a welcome easing. The 1-year-ahead eased to 3.3% from 3.5% while the 5yr eased back to 3.0% (exp. 3.1%). Note, the April inflation expectations were at 3.2% and 3.0%, respectively. Given the 5r inflation expectation has eased back to unchanged, it has helped soften some inflationary fears seen after the pick up at the start of the month in the prelim survey.

DURABLES GOODS: Durable goods rose 0.7% in April, way above the expected -0.8% and the prior 0.8%. Ex-transport rose 0.4% (exp. 0.1%, prev. 0.0%) and ex-Air lifted 0.3% (exp. 0.1%, prev. -0.1%). As Pantheon Macroeconomics states, “they had expected a much weaker number for headline orders, but the 11.2% drop in aircraft orders was much smaller than implied by Boeing orders data.” Overall, the consultancy adds, “Orders ex-transportation were merely unchanged in March this year, but it is impossible to know whether that reflected a weaker Easter effect or an offsetting improvement to underlying orders. The truth probably lies somewhere in the middle and, with that in mind, caution against reading the gain in orders ex-transportation as an improvement in the underlying trend.”

WALLER (2024, voter) spoke on the R, or neutral rate, he primarily provided an academic speech and did not speak on monetary policy or the economic outlook. However, he did provide potential reasons which could see a rise in R, and what has driven it lower for the past forty years. Nonetheless, one thing Waller did acknowledge was that he believes the 10-year Treasury yield is a good, real-world proxy for the theoretical value of the neutral rate. On reasons for why the neutral rate may rise, he suggested such as that US financing pressures may contribute to a climb in the longer-run neutral rate in the coming years, but only time will tell how large a factor the US fiscal position will be in affecting the neutral rate. He also noted if US Treasury supply begins to outstrip demand, this will put upward pressure on the neutral rate. Meanwhile, on the flipside, he stated that demographics will continue to put downward pressure on the neutral rate, while over the last forty years, demand for US safe, liquid assets outpacing supply has pushed Treasury yields and the neutral rate lower. Waller didn't specifically say whether he personally thinks it has risen or decreased, but earlier in the week he said it is hard to accurately estimate. Also, the latest Fed SEPs (released in March, to be updated in June) saw a rise in the longer run rate median, implying the FOMC do believe the neutral rate has shifted higher somewhat, in fitting with some recent Fed speakers, such as Governor Bowman.

FIXED INCOME

T-NOTE (M4) FUTURES SETTLE HALF A TICK LOWER AT 108-22+

Treasuries were ultimately little changed across the curve on Friday albeit with a flatter bias. At settlement, 2s +1.5bps at 4.948%, 3s +0.6bps at 4.719%, 5s +0.2bps at 4.528%, 7s -0.6bps at 4.491%, 10s -0.8bps at 4.467%, 20s -1.1bps at 4.667%, 30s -0.7bps at 4.573%

INFLATION BREAKEVENS: 5yr BEI +0.6bps at 2.337%, 10yr BEI +0.4bps at 2.330%, 30yr BEI +0.2bps at 2.324%

THE DAY: T-Notes meandered overnight before selling off once US players started arriving at their desks which ultimately saw two way price action on hotter than expected durable goods data. This came before T-Notes grinded higher after the US equity open ahead of the Final UoM survey for May. Overall, the report was a welcomed one which saw both the 1yr and 5yr inflation expectations ease from the prelim figures with the headline sentiment, conditions and expectations being revised up, albeit still notably lower vs. April. The easing consumer inflation expectations helped give T-Notes a helping hand higher before gradually moving higher into settlement, but not quite matching the European morning peaks. Some of the upside may have also been supported by Fed's Waller who was sceptical of a higher neutral rate, noting that he has not changed his view that the neutral rate is relatively low. Note that next week, US and UK markets are shut on Monday on account of holidays. However, it is an action packed week with focus on the US Core PCE data, the 2nd estimate of US GDP, a plethora of Fed Speak, as well as 2yr, 5yr, and 7yr supply.

STIRS:

• SR3M4 +0.0bps at 94.710, U4 +0.0bps at 94.870, Z4 -1.5bps at 94.995, H5 -2.0bps at 95.200, M5 -1.5bps at 95.405, U5 -1.0bps at 95.590, Z5 -0.5bps at 95.745, H6 +0.0bps at 95.865, H7 +1.0bps at 96.105, H8 +1.5bps at 96.155.
• NY Fed RRP op demand at USD 0.431tln (prev. 0.467tln) across 79 counterparties (prev. 79).
• SOFR at 5.31% (prev. 5.31%), volumes at USD 1.916tln (prev. 1.900tln).
• EFFR at 5.33% (prev. 5.33%), volumes at USD 82bln (prev. 80bln).

CRUDE

WTI (N4) SETTLED USD 0.85 HIGHER AT 77.72/BBL; BRENT (N4) SETTLED USD 0.76 HIGHER AT 82.12/BBL

The crude complex was firmer on Friday with a weaker Dollar after soft UoM inflation expectations supporting the move, albeit the upside was not enough to pare the weakness throughout the week. WTI and Brent were already on the front foot pre-data, but the soft inflation expectation metrics just aided the furore higher as oil attempted to recoup some its weekly losses as markets worry about demand and react to a lack of geopolitical escalation. As such, oil continued to extend through the US afternoon to settle just off highs. Nonetheless, energy specific catalysts were light although the OPEC+ meeting was pushed back one day to 2nd June, and Energy Intel's Bakr said it is expected to be smooth. Elsewhere, in the weekly Baker Hughes rig count, oil was unchanged at 497, nat gas down 4 to 99, leaving the total declining 4 to 600.

EQUITIES

CLOSES: SPX +0.70% at 5,304, NDX +0.99% at 18,808, DJIA +0.01% at 39,069, RUT +1.04% at 2,069.

SECTORS: Communication Services +1.29%, Technology +1.13%, Utilities +0.99%, Materials +0.88%, Consumer Discretionary +0.75%, Financials +0.68%, Industrials +0.55%, Consumer Staples +0.23%, Energy +0.13%, Real Estate +0.02%, Health -0.31%.

EUROPEAN CLOSES: DAX: +0.02% at 18,694.42, FTSE 100: -0.26% at 8,317.59, CAC 40: -0.09% at 8,094.97, Euro Stoxx 50: -0.02% at 5,036.35, IBEX 35: -0.58% at 11,246.00, FTSE MIB: +0.07% at 34,490.71, AEX: +0.10% at 915.21.

STOCK SPECIFICS:

• Nvidia (NVDA) +2.5%: Cuts China prices as it competes with Huawei.
• Intuit (INTU) -8.5%: Next quarter profit guidance was light. Although, earnings beat, with FY outlook surpassing expectations.
• Workday (WDAY) -15.5%: Cut FY25 subscription revenue outlook.
• Tesla (TSLA) +3%: To cut Model Y output at Shanghai plant by at least 20% during March-June 2024, according to Reuters citing sources.
• Eli Lilly (LLY) flat: Is to spend USD 5.3bln to make more Mounjaro and Zepbound, according to WSJ; sees new site to start making medicines near end 2026. CEO says they are delaying ex- US GLP1 drugs until supply improves.
• Ross Stores (ROST) +8%: Top and bottom line beat alongside raising FY profit view.
• Deckers Outdoors (DECK) +14%: EPS and revenue surpassed expectations.
• Guardant Health (GH) +13.5%: Resumed trading after the stock was halted since close on 22nd May. This morning, FDA AdCom recommends approval of Guardant Health's Shield blood test.
• Stericycle (SRCL) +15.5%: Reportedly weighing sale after getting takeover interest, according to Bloomberg.

US FX WRAP

The Dollar was lower to end the week and hit a trough of 104.630 as it could not sustain its post Flash PMI gains. On Friday’s data, Durable Goods exceeded expectations, with Final the UoM headline revised higher to 69.1 (prev. 67.4, exp. 67.5), as were Expectations and Conditions. The 1yr and 5-10yr inflation expectations encouragingly were revised lower from the prelim survey to 3.3% (prev. 3.5%) and 3.0% (prev. 3.1%), respectively. Fed speak was light, with only Waller (2024, voter) speaking on R, or neutral rate, and while he primarily provided an academic speech and did not speak on monetary policy or the economic outlook he did provide potential reasons which could see a rise in R, and what has driven it lower for the past forty years, but he said his view has not changed that the neutral rate is relatively low. Looking ahead, Core PCE is the key highlight next week, alongside the 2nd estimate of GDP and a plethora of Fed speakers. Note, US and UK are shut on Monday.

Activity currencies, CAD, AUD, NZD, and GBP, all saw gains vs. the floundering Greenback, with the Loonie outperforming and also seeing tailwinds from the rising oil prices. In terms of data, Canadian retail sales ex-autos surprisingly fell 0.6%, beneath the prior, revised lower, -0.2% and the expected 0.1%. The Pound managed to reclaim some of Thursday’s PMI-induced downside, albeit was initially hit in the UK morning on dismal Retail Sales data, which fell 2.4% (exp. -0.4%, prev. -0.2%), and saw Cable fall to a low of 1.2680. However, after the Greenback selling Cable managed to reclaim 1.2750, albeit briefly. For the Antipodes, while they were firmer, AUD/USD was unable to launch much of a recovery from recent losses which have seen the pair pullback from a 0.6709 high at the start of the week to a 0.6593 low on Friday. Meanwhile, The Kiwi has performed much better on account of a hawkish RBNZ rate decision.

CHF and JPY were flat against the Dollar, with the latter coming after mixed Japanese inflation metrics overnight which warrant a cautious stance from the BoJ and an unchanged rate at the June meeting. In Friday’s session, Diplomat Kanda told G7 that excessive and speculative FX moves are undesirable and requiring monitoring, and that Japan is ready to take appropriate action if FX markets see excessive moves.

EUR was firmer, and EUR/USD found support above the 1.08 mark. Price action this week has largely been at the whim of the USD with Thursday’s EZ PMI data overshadowed by the equivalent US release. This may remain the case until the release of next Friday's EZ CPI metrics. Once again there was a deluge of ECB speak, but little new was added.

EMFX was mixed. ZAR, RUB, and CLP firmed, TRY and BRL saw losses, with Yuan and COP flat. For the Chilean Peso, the Central Bank cut rates by 50bp to 6.00%, in line with expectations, further slowing their pace of rate cuts after 100bp in Jan and 75bp in April with the latest decision unanimous. The Central Bank suggested they will continue to cut ahead, with another 50bp expected for June, targeting 5.00% in Q4 and 4.00% in 2025, although decisions will be decided by the data. Lastly, BCB chief Neto noted global liquidity drain is a topic that will be discussed in detail in the following six months and added food prices may be slightly higher due to flooding in Rio Grande do Sul state.