Opposing inputs have sent asset classes in different directions, each choosing, it seems, the information that supported their respective paths of least resistance. Former Fed Governor Ben Bernanke warned about stagflation overnight, quite the statement from a former heavyweight. Present Chairman Jerome Powell, was also hawkish, saying the Fed Funds may have to move well above the market’s preferred terminal rate (around 3.50%), for a while, to bring inflation back down.
Oil falls as EU allows ruble payments
On the more positive side, the European Union clarified advice on what constituted meeting sanctions restricted payments for Russian natural gas for EU importers. Basically, the advice allows the importers to pay in euro or US dollars into Gazprombank, and then have it converted via a ruble account. Secondly, the US moved to ease restrictions on Venezuelan oil exports, allowing Chevron to have narrow conversations with Venezuela’s PDVSA. Restrictions could be eased on exports if talks between the government and opposition parties make progress. Those headlines sent oil tumbling, offsetting a surprise drop in API crude inventories, and soaring diesel prices in parts of the US.
Finally, despite the doom and gloom and predictions of recessions, US Retail Sales, Manufacturing and Industrial Production all posted excellent numbers last night. Helping the soft landing theory I suppose, although you could also say it meant harder and faster Fed rate hikes. Walmart’s downgraded outlook for 2022 was subsumed in that noise.
All-in-all it was a bottom pickers heaven. Equities chose to look at the US data, and the Venezuela headlines and sent stocks sharply higher. Oil markets had toughed multi-week highs yesterday but staged a huge reversal and slid on the Venezuela headlines, ignoring the fact that political progress is required for any unlocking of sanctions. Bond markets ignored everything else and concentrated on the Bernanke and Powell headlines, sending the yield curve sharply higher. Currency markets used the strong US data, EU gas capitulation and lower oil prices to sell the US dollar and load up on sentiment currencies like the euro and Australian dollar, with Asian FX having a decent session as well. Gold did nothing, but we’re all used to that.
To be fair, the overnight session did have something for everyone if you applied blinkered vision and ignored what didn’t suit your view. The FOMO gnomes of the stock market remain desperate to buy the dip, although I suspect they’re going to discover it will be a bear market rally. The US dollar had come a long way in a short time, and as mentioned yesterday, was overdue for a downward correction anyway. Oil was a surprise, but I believe an unfreezing of Venezuelan oil will be a game-changer for energy markets, should it occur. Notably, WTI prices are now higher than Brent crude prices, and I can’t remember when that last happened. I do believe the downside will be limited because of that as gasoline and diesel prices in the US soar.
Bond yields rightfully moved higher and get my vote for the only market overnight to cover itself in some sort of intellectual glory. That doesn’t mean we can’t see equities extend gains, helped along perhaps by soothing technology company noises from China and a Shanghai reopening. Similarly, the US dollar correction lower has plenty of room still and remains in a structural bull market. The Fed will hike by 0.50% next month and start reducing its balance sheet. That reality will return to markets the closer we get to the June meeting, but for now, we will let the remnants of the 2020/21 buy-everything rally have their day in the kiddie’s playground.
In Asia today, markets have been buoyed by supportive comments around China tech companies from a senior government official. Additionally, Shanghai authorities have announced that 864 financial institutions will be allowed to resume operations, and officials say a full mid-June reopening remains on track. The light at the end of the Shanghai tunnel will be a welcome lift to the sombre covid-zero mode afflicting China and other regional markets. However, we may not have heard the end of covid-zero.
Japan’s GDP data showed the economy contracting in Q1, but not by as much as expected as the weaker yen and rising imported costs weakened economic activity. Preliminary QoQ GDP Growth for Q1 fell just -0.20% versus -0.40% expected. Consumer spending for the same period held at 0.00% versus -0.50% expected. A pretty decent win in Japan terms. Additionally, the USD 21 billion supplementary budget has been passed to assist with cost-of-living increases and the government’s Upper House elections in July. Expect another one if the expected rebound in Q2 GDP and consumer spending doesn’t materialise.
Australian wage growth by 0.70% QoQ for Q1, and by 2.40% YoY, both slightly less than expected. The still-benign wage environment should take the heat off the RBA to hike by 40 bps in August, with 0.25% likely pencilled in. On the negative side, China’s House Price Index rose only 0.70% in April YoY, far below the 1.50% expected. The covid zero lockdowns are to blame but it will be interesting to see if housing market confidence returns after the lockdowns finish, with private developer leverage still a slow-moving trainwreck.
The UK releases inflation data this afternoon although its impact is likely to be muted given the brutally honest raising of the inflation white flag by the Bank of England Governor this week. More pressing is the UK sorting out the Brexit mess around the Northern Island protocol and avoiding a trade war with the EU. I will probably be saying that 10 years from now. Eurozone inflation is also due with the final YoY April number expected to be around 7.50%. That will keep the pressure on the ECB to start hiking, likely as early as next month, but that is mostly built into the euro now.
US Housing Starts and the Official Crude Inventory series dominate the calendar in US markets. If the overnight session is anything to go by though, markets direction will be dominated by Fed talking heads and whichever data they wish to selectively choose, or ignore, to support the narrative. That narrative being the worst is over for stocks because markets have priced all the bad news from the Fed in and a recession will slow inflation. Oh dear….
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