Markets may have a post-FOMC hangover. The Fed stuck to the patient script but inflation optimism took rate cut bets in the short-term off the table. The dollar has little to show this morning, while stocks are pointing to a mixed open.
US Data – Labor market remains robust
FOMC – Still patient… adds transitory factors at work
BOE – More than one hike needed for inflation target
Stocks – S&P slight rebound after biggest selloff in 5 weeks
Oil – Lower on stockpiles surge and Maduro still controls military
Gold – Dovish induced Fed rally may stall
Jobless Claims came in higher than expected but that may be attributed to the Easter holiday and spring break. Data around those dates are typically volatile and do not raise any alarm that the labor market is losing momentum. Yesterday’s ADP employment report surprise of 275,000 new jobs showed the slow start of the year did not impact hiring. Expectations are for tomorrow’s nonfarm payroll report to see a gain of 190,000 jobs, the range is 120,000 to 250,000 jobs.
The nonfarm productivity reading for the first quarter grew at the fastest pace since 2014. The unit labor costs also declined 0.9%, down from the revised higher prior of 2.5%. Increases productivity could mean the economy can grow further without triggering a surge with inflation.
The Fed is likely to remain patient throughout the summer and contrary to what Fed Fund futures are saying, they see transitory factors at work on inflation and that it will pick up later in the year. Short-term interest rate futures fell after yesterday’s meeting and they now see a 29% chance of a cut at the September and a coin flip for the December meeting.
The financial services and apparel prices have kept Core PCE lower and those are the transitory factors Powell are most likely what Powell was referencing. Inflation will be closely watched and even if we see another weak reading next Friday, we may not see too much of jump on rate cut bets.
The British pound whipsawed after the BOE was nowhere as hawkish as market participants expected. The Bank kept rates steady in a unanimous vote, but many were expecting Saunders to dissent. Cable spiked higher on the headline that the BOE signals more than one hike needed to keep inflation in check. The BOE quarterly inflation report (QIR) saw cuts to the inflation outlook and raises to the growth forecasts. Expectations now see a 65% chance for a hike at the November meeting.
Earnings results are still coming with roughly 70% of the S&P 500 companies already reporting. This morning we saw results from Fluor and Cigna. Fluor reported poor results as revenue came well below expectations and their CEO stepped down. Healthcare giant, Cigna reported roughly in-line EPS and raised their forecast.
Much of Wall Street remains optimistic in the short-term. JP Morgan in a note advised their clients not to bail on the market. RBC thinks the S&P 500 could overshoot 2950 in the short-term. While Morgan Stanley thinks a rally to 3,000 would trigger a sell signal. Canacord Genuity thinks we could see near-term losses capped at 5%.
Crude prices continue to selloff as expectations grow for OPEC + to abandon to their production cut pledge. The first half of the week saw oil lower mainly on the rising stockpiles from the US. The US government data saw inventories jump to almost 10 million barrels last week, almost four times what analysts were expecting. Reportedly Saudi Aramco received request from Asian buyers for additional oil supplies in June and July. It is unclear if this on top of what was needed to makeup for the shortfall from the lifting of waivers on Iranian sanctions.
It appears the Venezuelan story is slowly making its way to the back pages. The immediate tension seems to have been alleviated, but that story will not be going away anytime soon. Venezuela, which holds the world’s biggest cruder reserves is likely to see continued protests that are led by opposition leader Juan Guaido.
The precious metal continues to weaken post FOMC and is dangerously approaching support levels that may not be able to withstand the optimism that will come from a trade deal between China and the US. While central banks have ramped up purchases at the fastest pace in six years, that may not be enough of a catalyst if we continue to see stronger data out of Europe and a trade induced rebound.
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