- SNAPSHOT: Equities up, Treasuries up, Crude up, Dollar flat.
- REAR VIEW: Softer-than-expected US Retail Sales; Deluge of Fed Speak, but ultimately toes similar line to Powell; Stellar US 20yr auction; Better-than-expected Industrial Production data; RBA reiterates hawkish language; Berkshire raises stake in OXY
- COMING UP: Holiday: US Juneteenth; The desk will shut at 18:00BST/13:00EDT and re-open the same day for the beginning of Asia-Pac coverage at 22:00BST/17:00EDT, Data: UK CPI, PPI, South Africa CPI, NZ GDP, Events: BoC Minutes, Supply: Germany
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MARKET WRAP
Indices were contained on Tuesday but edged higher (SPX +0.3%, NDX flat, DJIA +0.2%, RUT +0.2%) as SPX climbed to another record high with Nvidia topping Microsoft's market cap. Sectors were largely in the green with Financials and Tech sitting atop of the pile and Communication Services, Consumer Discretionary, and Materials the only ones in the red. On the day, there was a deluge of Fed speak (reviews below), although they garnered little market reaction as they ultimately toed a similar line to Fed Chair Powell, while on the data footing US retail sales were softer than expected, but on the contrary industrial production was better than forecasted. Moreover, after the aforementioned retail sales T-Notes were bid across the curve, and saw even further impetus after a stellar US 20yr bond auction. In FX, the Dollar was choppy but climbed off retail sales-induced lows with the Swissy and Aussie the clear G10 outperformers with the latter buoyed by a hawkish language from the RBA. The crude complex was firmer, continuing on Monday's extensive gains, in thin energy-specific newsflow as geopolitical headlines took a back seat. Looking ahead, it is Juneteenth market holiday in the US on Wednesday so US players will be out for the day, and as such the calendar docket is very thin with only NAHB housing market index scheduled.
US DATA
RETAIL SALES: Retail sales was softer than expected with downward revisions to the prior month. The headline M/M rose just 0.1%, up from the prior -0.2% (initially 0.0%) read but beneath the 0.3% forecast, matching the most pessimistic estimates too. The core measure (ex-autos & parts) declined by 0.1% despite expectations for a 0.2% gain, matching the pace of last month's decline (initially 0.2%). The super core metric (ex gas, autos and parts) rose 0.1%, vs. the prior decline of 0.3% (initially -0.1%). The control metric however rose 0.4%, in line with expectations but the prior was revised down to -0.5% from -0.3%. Looking within the report, the upside was led by Sporting goods, hobby, musical instrument, & book stores, rising 2.8%, Clothing & clothing accessories stores rose by 0.9% while Nonstore retailers rose by 0.8%, as did motor vehicle and parts dealers. On the flipside, the largest decline was seen in Gasoline stations, -2.2%, while Furniture and home furn. stores declined by 1.1%, with Building material & garden eq. & supplies dealers dipping 0.8%. The overall soft retail sales number adds to more evidence of a softening consumer although do note the Q2 24 Atlanta Fed GDPNow tracker was unchanged at 3.1% post-data, while perhaps the control group was not as soft as the rest of the data. Money markets are still fully pricing in the first 25bp rate cut by the Fed by November, with a c. 72% probability of a cut occurring in September. Looking ahead, analysts at ING "expect consumer spending to continue cooling through this year as flat real household disposable incomes constrain spending power while the exhaustion of pandemic-era accrued savings means there are fewer resources from this pot to keep spending going". The desk adds that if they see more evidence of consumer cooling, coupled with further gains in the unemployment rate, and M/M core inflation at 0.2% or lower, then a September rate cut will clearly be on the table for discussion.
INDUSTRIAL PRODUCTION: Industrial production rose 0.9% in May (prev. 0.0%), above the expected 0.3% and the top end of the forecast range of 0.7%. Manufacturing output also lifted 0.9% (prev. -0.4%, exp. +0.3%), with capacity utilisation ticking higher to 78.7% (exp. 78.6%) from 78.2%. After the data set, Oxford Economics notes IP is forecasted to remain unchanged this year after inching 0.2% higher in 2023, but the better-than-expected May reading creates upside risk to its near-term forecast. Moreover, the consultancy adds, “After an uneven start to the year, IP will edge higher during the remainder of 2024. However, it won't take off meaningfully until next year after the Federal Reserve's rate-cutting cycle gets underway.” Oxford adds manufacturing led May's sharp uptick in industrial production, while warmer than usual weather boosted utilities output. Mining output inched higher but still hasn't returned to levels prevailing before severe winter storms disrupted the sector in January.
FED
WILLIAMS (Voter) stated that the rate cut path will depend on the data and that rates will come down over the next few years but he expects them to come down gradually as inflation eases. He acknowledged that things are moving in the right direction for monetary policy, adding the US economy is doing well and is in better balance. He also acknowledged that alongside the very strong economy, incomes are growing and that recent data has been encouraging. However, 3% inflation is not the new normal and the Fed will get inflation down to 2%. Williams also stated the US still has a very strong labour market, but some hiring is slowing.
BARKIN (2024 voter) said the US is clearly on the backside of inflation, but it is hard to know how much of a signal to take from inflation last year, this quarter, or the last couple of weeks. Barkin said that he was supportive of last week's decision, noting the Fed will learn a lot more over the next several months. There is also a strong sense the Fed is at a restrictive level, but it is a fair question on how restrictive policy is. On inflation, the Richmond Fed President said that on the service side, he still thinks firms are exploring raising prices as much as possible, but the May inflation print was very encouraging, although shelter and services inflation is not quite there. He noted that headline inflation numbers are heading completely in the right direction, while consumer spending is still solid and that dynamics underpinning spending are the strong jobs market and the stock market at record levels. On the labour market, Barkin added it is also heading in the right direction, but the hiring rate has dropped a lot. He is closely watching to see if there is an acceleration in the layoff rate. He acknowledged labour market numbers are very strong, but inflation is still not at target, and that said, it is not hard to see scenarios where the labour market weakens.
KUGLER (2024 voter) said it is likely appropriate to begin easing policy sometime later this year if the economy evolves as expected. She added policy has more work to do and judgement will be guided by data, continuing to echo the data-dependant approach. On inflation, said it is still too high, but encouraged by renewed recent progress and further progress likely to be gradual. In later remarks, Kugler noted how much they cut will be a question they continue to assess as more data comes in and it is not an answer they can give today. She further added it depends on whether it is from disinflation or rapid deterioration of the labour market. And in response to why no cut at the next meeting, said there are risks on both sides of the mandate.
MUSALEM (2025 voter) speaking for the first time in a very long time, noted he needs to observe a period of favorable inflation, moderating demand and expanding supply before he will have confidence for an interest rate cut; these conditions could take months and more likely quarters to play out. Musalem added if inflation becomes stuck meaningfully above 2% or moves higher, he would support additional policy tightening. On PCE (due 28th June), he said PCE price index should show welcome downshift of inflation in May. As a reminder, on Monday, WSJ's Timiroas posted on X "With the PPI and import price data in hand for May, the inflation modelers who map the CPI/PPI into the PCE now expect the core PCE index rose around 0.08%-0.13% in May...".
COLLINS (2025 voter) said it is appropriate for the Fed to remain patient on monetary policy, and she cautioned against overreacting to the recent inflation data. Collins remains a ‘realistic optimist’ on the economy and monetary policy, she also said it is too soon to say if inflation is retreating again to 2%, but recent inflation data has been encouraging. The Fed has made notable progress in lowering inflation and the economy has been remarkably resilient, but inflation is still stubbornly above the 2% target.
GOOLSBEE (2025 voter) said the inflation number that came out during last week's meeting was 'excellent' and hopefully "we'll" see more data like that. Looking ahead, Goolsbee noted they cannot help be optimistic if you look at the long view.
LOGAN (2026 voter) said inflation is still too high, but may have made tremendous progress. On last weeks data, said May CPI data was welcome news and will need to see several more months to have confidence leading to 2%. Logan further highlighted the Fed's data-dependent approach and that the neutral rate is probably higher now that it was before the pandemic.
FIXED INCOME
T-NOTE (U4) FUTURES SETTLED 12+ TICKS HIGHER AT 110-25+
T-Notes were bid across the curve after softer-than-expected retail sales data. At settlement, 2s -5.3bps at 4.708%, 3s -6.4bps at 4.434%, 5s -6.2bps at 4.238%, 7s -6.0bps at 4.216%, 10s -5.8bps at 4.221%, 20s -5.5bps at 4.465%, 30s -5.4bps at 4.356%.
INFLATION BREAKEVENS: 5yr BEI +0.2bps at 2.194%, 10yr BEI -0.1bps at 2.228%, 30yr BEI -0.4bps at 2.261%.
THE DAY: T-Notes headed lower throughout the European morning led by a hawkish RBA hold where the bank did discuss a rate hike at the meeting, but he later caveated that the case for a rate hike is not increasing, although they also did not consider the case for a rate cut. Meanwhile, also weighing on the curve was remarks from BoJ Governor Ueda who signalled the BoJ could hike next month, depending on data. Nonetheless, the overnight and morning weakness had pared on the soft US retail sales data, which was also accompanied by downward revisions, sending more signals of a slowing consumer. 10yr T-Note futures rose to 110-22+ in wake of the data before paring marginally ahead of the 20yr bond auction. The stellar bond auction saw T-Notes spike to fresh session highs of 110-28+, nonetheless, the post-auction spike swiftly pared but T-Notes still remained above the post retail sales data peak heading into settlement. Note, there was also a deluge of fed speakers but all ultimately toed a similar line to Fed Chair Powell.
20YR: The USD 13bln auction of 20yr bonds was ultimately very strong. The auction saw a high yield of 4.452%, stopping through the when issued by 2.8bps, the largest stop-through since November 2022, and much larger than the prior stop-through of 0.2bps and the six auction average of a tail of 0.1bps. The B/C ratio was also strong at 2.74x, above the prior 2.51x and average of 2.6x. The strong demand was led by Indirect bidders, which took 77.9% of the auction, well above the prior 70.8% and average of 67.8%. Direct demand saw a step back to 16.4% from 19.2%, beneath the 18.9% average, although the sizable increase from indirect bidders saw dealers, forced surplus buyers, take just 5.8% of the auction, down from the prior 10.1% and average of 13.3%.
STIRS:
- Market Implied Fed Rate Cut Pricing: September 18bps (prev. 17bps D/D), November 28bps (prev. 26bps), December 49bps (prev. 45bps).
- NY Fed RRP op demand at USD 376bln (prev. 333bln) across 68 counterparties (prev. 66).
- SOFR at 5.33% (prev. 5.31%), volumes at USD 1.975tln (prev. 1.855tln).
- EFFR at 5.33% (prev. 5.33%), volumes at USD 83bln (prev. 87bln).
CRUDE
WTI (Q4) SETTLED USD 0.99 HIGHER AT 80.71/BBL; BRENT (Q4) SETTLED USD 1.08 HIGHER AT 85.33/BBL
The crude complex was firmer on Tuesday, continuing on Monday's extensive gains, in thin energy-specific newsflow. As such, WTI and Brent largely reacted to the broader Dollar moves, as while it was initially pressured in the European morning on the Buck strength, the indices hit intra-day highs in wake of the soft US retail sales data which saw the Dollar Index fall to lows. Thereafter, WTI and Brent sustained the upward momentum to settle at highs in a lack of any geopolitical rhetoric. For the record, one of the more recent updates received was that Lebanon's Hezbollah published drone footage that claims to show surveillance of Haifa in Israel, 27km from the border. Looking ahead, participants await the private inventory data after-hours where current expectations are (bbl): Crude -2.2mln, Distillate +0.3mln, Gasoline +0.6mln. Note, on Wednesday it is the Juneteenth public holiday.
EQUITIES
CLOSES: SPX +0.25% at 5,487, NDX flat at 19,909, DJIA +0.15% at 38,835, RUT +0.16% at 2,025.
SECTORS: Communication Services -0.77%, Consumer Discretionary -0.42%, Materials flat, Utilities flat, Consumer Staples flat, Health flat, Real Estate +0.36%, Energy +0.46%, Industrials +0.55%, Technology +0.61%, Financials +0.64%.
EUROPEAN CLOSES: DAX: +0.31% at 18,124, CAC 40: +0.76% at 7,629, PSI: +0.78% at 6,571, FTSE 100: +0.6% at 8,191, IBEX 35: +0.99% at 11, 068, FTSE MIB: +1.24% at 33,316, SMI: +0.30% at 12,040, Euro Stoxx 50: +0.71% at 4,915.
STOCK SPECIFICS
- Boeing (BA) - CEO said in a Senate hearing that the Alaska Airlines door plug incident was a result of a manufacturing defect; Titanium from suppliers has met standards, and here was a very discreet miss with a lack of paperwork for the removal of the door plug in Alaska Airlines January 5th flight. US Senator Blumenthal says there is overwhelming evidence that the Justice Department should pursue prosecution against Boeing. Meanwhile, NASA delayed BA's Starliner spacecraft's return to earth again and is now targeting June 26th.
- Lennar (LEN) - Guidance for next quarter: new orders and deliveries missed expectations. Co. did beat on earnings and revenue. Expects Q3 profit to be between USD 3.50-3.65/shr (exp. 3.93); Exec says given the cost of living expenses and inflation rates, the consumer is definitely feeling a little bit more distress.
- Super Micro Computer (SMCI) - Adding three new manufacturing facilities in Silicon Valley and globally.
- Phillip Morris International (PM) - Swedish Match North America (PM affiliate) is taking steps to immediately ban online sales on ZYN.com after receiving a subpoena from the District of Columbia.
- NextEra Energy (NEE) - Plans to sell USD 2.0bln of equity units, each valued at USD 50.00.
- Silk Road Medicals (SILK) - To be acquired by by Boston Scientific (BSX) for USD 27.50/shr in cash. Note, SILK closed Monday at USD 21.67/shr.
- Citigroup (C) - Said it is confident in its ability to achieve medium-term targets; and it remains on track to meet 2024 guidance. CFO expects net interest income excluding markets to be modestly down this quarter; he expects markets to be down or flat-ish for Q2.
- Apple (AAPL) - EU antitrust regulators have accepted several measures from Apple regarding its tap-and-go payments system and an associated probe, according to FT citing sources. Elsewhere, the Co. suspended work on the next high-end headset and focused on releasing a cheaper model in late 2025, according to The Information.
- Occidental Petroleum (OXY) - Berkshire Hathaway has acquired another 2.95mln shares in the Co. bringing his stake to nearly 29%.
- Chip names - Lawmakers reportedly look to bar Chips Act winners from using Chinese tools, according to Bloomberg; Intel (INTC) and TSMC (TSM) would be unable to buy Chinese gear for US plants.
- Dollar Tree (DLTR) - Was cited by the FDA for selling lead-tainted Apple Sauce; DLTR reportedly kept selling apple sauce after the lead recall.
- Hewlett Packard Enterprise (HPE) and Nvidia (NVDA) - Announced "Nvidia AI computing by HPE" to accelerate the generative AI industrial revolution.
- Embraer (ERJ) - CEO says Co. is confident in meeting 2024 production guidance of 72-80 commercial jets, is eyeing output of 80-90 jets next year. Believes it will be able to return to production of 100 commercial jets per year by 2026 at the latest.
- Nvidia (NVDA) - To reach a deal to buy software startup Shoreline.
US FX WRAP
The Dollar ended the day flat. Despite saying this, heading into US retail sales it was slightly firmer, however, after the cooler-than-expected print the DXY pared its intraday strength and hit session lows of 105.120, before recovering off lows through the US afternoon. US retail sales turned positive in May following a revised lower headline in April, which put it into negative territory - the headline was driven by sizeable increases in sporting goods, hobby, and musical instruments, however, concerns regarding consumer spending and sentiment continue to rise, especially after prelim UoM June data missed last Friday. In Fedspeak, a deluge of speakers spoke, including Collins, Logan, Musalem, Gooslbee, Kugler, Barkin, and Williams. Musalem's remarks were of interest since he hasn't spoke in over a year, saying "he needs to observe period of favorable inflation, moderating demand and expanding supply before he will have confidence for an interest rate cut; these conditions could take months and more likely quarters to play out".
The Euro was eventually flat against the Buck, but EUR/USD spent most of the European session near lows (1.0710-61). On data, German ZEW Economic Sentiment slightly rose to 47.5 (prev. 47.1, exp. 50); its highest figure since February 2022. Perhaps optimism failed to spark due to current conditions deteriorating vs market expectations of improvement and the headline missing expectations. Final EZ Core and headline Inflation Y/Y data were as expected at 2.8% and 2.6%, respectively. The Euro picked up from session lows in response to the aforementioned soft US retail sales data, peaking at session highs of 1.0761. Meanwhile, a Reuters Poll revealed 64/81 economists see the ECB cutting rates in September and December (prev. 41/66). Note, ECB's Knot noted inflation might start climbing again and they should not pre-empt future rate developments.
Cyclical currencies are mixed against the Dollar, with the Aussie outperforming. AUD was initially muted after the RBA kept the Cash Target at 4.35% as expected, though modestly strengthened following hawkish comments from RBA's Bullock noting "need a lot to go our way to bring inflation back to range", further adding, "the board discussed whether to hike rates at the meeting" but "did not consider the case for a rate cut at the gathering". The Kiwi is slightly firmer ahead of Wednesday's GDP Growth rates and Westpac Consumer Confidence; CAD is flat, despite firmer oil prices, and so too is the Pound ahead of UK CPI and PPI on Wednesday.
The Yen and Franc diverged in Tuesday's session, with the Franc outperforming relative to G10FX peers, amid no fresh catalyst quashing political uncertainty in France; while the Yen was the only G10 currency in the red against the Greenback ahead of the BoJ Monetary Policy Meeting Minutes on Wednesday. Overnight BoJ Governor Ueda spoke and he signalled the BoJ could hike next month, depending on data.
Scandi's (NOK, SEK) both strengthened against the Euro and Dollar, with the SEK's upside less pronounced, ahead of Swedish's May Unemployment Rate on Wednesday.
In EMFX, the HUF is firmer despite the NBH cutting its base rate by 25bps to 7.0%, as expected. CLP is flat against the Buck ahead of the Chilean Central Bank's rate decision. MXN also strengthens, with data seeing Aggregate Demand Q/Q rising 1.5%, (prev. 0.9%) above the 30-year average of 0.75%; ZAR's rally continues into South Africa's Inflation print on Wednesday.
