PMI Day: Rates Rise, Stocks Stalled

A Brave New World

Yesterday a fake AI-generated photo showing an explosion near the Pentagon in Washington D.C. went viral and sparked a brief sell-off in the markets. To be fair, algos are going to algo on any headline, and human error or whatever can do this...but take note. Trump tweets did worse.

In any case, there is a cautious tone to trade today with debt ceiling talks continuing and the market in a bit of a chop mode. The Nikkei finally cooled off, the DAX retreated a bit more from its record high and the FTSE 100 continues to linger around the 7,770 area. BT can’t catch a bid despite Drahi raising his take to almost a quarter…bid to come? I can’t imagine the government would allow BT to be taken over whatever happens – if it can’t let MSFT through with Activision then BT is a no-go zone. Mondi, Smurfit Kappa and Airtel were among the early leaders on the FTSE 100, rising about 1% each, whilst RS Group led the decliners, falling over 3%.

Mix Up

US markets were also mixed with the Nasdaq up half a percent with Tesla +5% on positive momentum and the Dow sliding a similar margin despite Treasury yields firming up once more with the US 10yr above 3.72% and the front-end going even harder as the 2yr tops 4.375%. Debt ceiling update – McCarthy said talks on Monday were ‘productive’ but still no deal.

Tesla popped as the momentum sticks with the bulls with breakout from 50-day SMA – pure momentum trade. Micron fell after China ban. Meta shrugged off a €1,2bn EU fine to rally another 1%, Apple slipped as Loop downgraded. PacWest +20% and Western Alliance +10% after former offloads $2.6bn in construction loans. What regional banking crisis?

I might have to retire this one... or maybe not yet…

LOL – like there would be any other answer: the Credit Derivatives Determinations Committee says the sale of CS to UBS was not a bankruptcy event in which insurance could be paid out. They are not going to open this one up to anyone – Swiss authorities are closing ranks.

PMI Day

German manufacturing down to 42.9 from 44.5, services stronger though to leave the composite a bit firmer at 54.3. France composite at 51.4 from 52.0 expected – a tad softer. Eurozone: HCOB notes fifth straight month of expansion but a 3-month low on the headline reading.

Japan’s private economic activity is surging – the latest Jibun Bank Japan flash composite PMI jumping to 54.9, its highest since Oct 2013...what does the BoJ do about this? It will have at some point to recognise that inflation is not just being imported but is entering a self-sustaining dynamic that will be fuelled by continued ultra-loose monetary policy.

Which leads us nearly on to the first of some important inflation releases came today with the Bank of Japan core CPI rising by more than expected at 3.0%. UK inflation is tomorrow and is forecast to drop sharply, coming down to as little (!) as 8.2% from 10.1%.

No illusions for UK inflation

Are Brits suffering Realitätsfremd, that is, out of touch with reality? With regards inflation it seems maybe they are the most pragmatic. An Ipsos Mori survey shows we are among the most pessimistic about inflation expectations. Out of 29 countries, the UK has the second highest proportion of people who don’t think inflation will return to normal within a year. Another way to look at this is to say we are the second-most financially literate and logical. Only the sensible Swedes are more pessimistic. Blame of the Bank of England for never jumping in front of the train. It never grasped the nettle and said ‘we’ll do whatever it takes’, unlike the Fed’s much more assertive rhetoric. Bailey and co have spent their time bemoaning workers asking for more pay instead of wielding their blunt tool more vigorously. We hear from them today - Bank of England governor Andrew Bailey will appear before parliament alongside chief economist Huw Pill fellow MPC members Catherine Mann and Silvana Tenreyro. Dallas Fed president Lorrie Logan also in action later.

Force Fed

St Louis Fed boss James Bullard called for another two hikes this year – but he is at the most hawkish end of the FOMC. Minneapolis Fed President Neel Kashkari, usually among the most dovish, said rates may have to go "north of 6%" for inflation to return to the Fed's 2% target – implies 3 more hikes! Markets pricing in tighter ECB also – HSBC now sees 25bps hikes in June, July and September to take the deposit rate to 4.0%.

Elsewhere, the dollar remains on the front foot with rising Treasury yields acting as a tailwind – USDJPY rose to a 6-month high, whilst EURUSD is sliding again after the bounce off last week’s two-month low stalled.

GBPUSD – Pretty wobbly looking support at the 50-day line, dollar still bid.

Crude – Spot WTI with a weakish-looking bullish MACD crossover, price action still very sideways with 21-day EMA offering resistance.

Gold – Testing the lows again from last week around the 23.6% retracement