Stocks Slip in Muted Trade, Debt Ceiling in Focus

European Equity Down as US Debt Closes in

European stock markets slipped lower in early trading on Tuesday with some catch-up in London after the coronation holiday. US markets were muted on Monday with debt ceiling shenanigans heating up – Treasury secretary Janet Yellen said failure to raise the debt ceiling "could produce financial chaos" and it "would have an adverse impact on the dollar’s use as a reserve currency". Treasury yields were a bit lower, 10s just under 3.5%, but holding the post-NFP firmness – US labour market not showing any signs of weakness supports the idea that we not only do we not see cuts this year but we also see more hikes. As I said last week – Powell’s job was about leaving the option of a hike in June on the table. The dollar trades higher, cable testing 1.260 support, the euro tracking under 1.10. Oil fell after three days of gains.

Global Data Mixed

Data this morning showed China exports grew 8.5% year-on-year, more than forecast, demonstrating demand remains solid globally. However, imports slumped by 7.9%. UK consumer spending grew at about half the pace of inflation – less is more! Meanwhile Halifax says house prices declined between March and April after three months of growth.

The Fed’s Financial Stability Report showed respondents are worried about "persistent inflation and tighter monetary policy, banking-sector stress, commercial and residential real estate and geopolitical tensions". It also noted that “significant strains in the banking sector, along with increased uncertainty about the economic outlook and the path of monetary policy, led to notable fluctuations in financial asset prices”. Despite this, market functioning remained relatively resilient, the Fed says.

Policymaker Uncertainty

Meanwhile Chicago Fed president Goolsbee warned "the credit crunch or at least the credit squeeze is beginning... recession is a possibility". The Fed's quarterly Senior Loan Officer Opinion Survey, or SLOOS, showed a net 46% of banks tightened terms of credit for a key category of business loans for medium and large businesses, up from 44.8% in January.

Elsewhere, Bank of Japan governor Kazuo Ueda said there is no pre-set path for monetary policy, stressing that the central bank will abandon yield curve control “when we can foresee inflation sustainably and stably meeting our 2% target”. Ueda was referring to the BoJ statement in which it “decided to conduct a broad-perspective review” of its “easing measures”.

Earnings

The earnings focus today will be on Airbnb’s Q1 report after bumper reports from Expedia and Booking last week. Add to that the strong airline booking stats and ABNB could be big. It finished 2022 on a high, delivering its first full year of profitability. Surging foreign travel saw cross-border trips up 49% in Q4 and the outlook for the start of 2023 is also promising. In its Q4 report the company flagged continued strong demand at the start of 2023 and said revenue in the first quarter will be between $1.75 billion and $1.82 billion, slightly down on Q4’s $1.9bn but up a fifth from the $1.5bn in Q1 2022, itself up 70% year-on-year.

Elsewhere in the Markets...

Looking ahead to later in the week, US CPI inflation for April is the main event. Inflation eased in March to the lowest level in almost two years but a rise in core price growth alarmed policymakers. CPI for March fell to 5% year-on-year, down from 6% in February. However, core hit 5.6%, up 0.4% on the month, suggesting that sticky inflation will continue to dog the Fed.

And With inflation continuing to run in double digits in the UK, the Bank of England is widely seen raising rates by 25bps again. Whether it has the bottle to keep hiking and make it clear it will do whatever it takes to tame inflation is a lot less clear. Huw Pill, the Bank’s chief economist, recently said people should accept being poorer. The problem for the BoE is the housing market and all those fixed-rate deals rolling off this year and next.