Summary: The S&P 500 took a look above 4,300 before closing just below while NASDAQ 100 led the gains as megacap tech took the reins once again on Friday. China’s May CPI disappointed and stimulus calls ramped up. Oil prices slumped again with Brent below $75, while EU gas prices rose on concerns of tightening supplies. Critical week ahead with US CPI and Fed, ECB and BOJ meeting on tap.
US equities continued their upward trajectory in a subdued Friday session, as investors braced themselves for upcoming releases of CPI data and the Fed’s FOMC meeting. The S&P 500 added 0.1% to reach 4,299, while the Nasdaq 100 gained 0.3% to close at 14,528. Megacap tech stocks took the reins once again, while the Russell 2000 retreated by 0.8%. Among the S&P 500 sectors, information technology and consumer discretionary emerged as the top performers, while materials, utilities, and energy lagged behind.
Tesla (TSLA:xnas) saw a significant boost of 4.1% following General Motors' (GM:xnys) announcement of joining Tesla's charging network, highlighting the growing importance of electric vehicle infrastructure. Adobe (ADBE:xnas) and Advanced Micro Devices (AMD:xnas) both experienced gains of over 3% as investors continued to show interest in companies that may benefit from the AI frenzy. Netflix (NFLX:xnas) rose by 2.6% after reports indicated that the company's efforts to crack down on password sharing were proving successful, leading to an increase in new subscribers.
The anticipation of a forthcoming double coupon supply on Monday, featuring $40 billion worth of 3-year notes and $32 billion of 10-year notes scheduled for auction, had a dampening effect on Treasuries prices. Selling pressure was particularly concentrated on the front end of the yield curve. Furthermore, a significant block trade implementing a 2-year versus 30-year flattener strategy added to the downward pressure on the front end. As a result, the 2-year yield surged by 8bps, closing at 4.6%, while the 5-year yield climbed 5bps to 3.81%. Conversely, the impact on the longer end of the curve was relatively mild, with the 10-year yield ticking up by only 1bps to 3.74%, while the 30-year yield slid by 1bp to 3.88%.
In a volatile trading session, the Hang Seng Index and CSI300 staged a recovery on Friday, with gains of 0.5% and 0.4% respectively. Investor optimism regarding potential policy stimulus from Chinese authorities boosted market sentiment. However, concerns over the risk of local government financing vehicles being overextended weighed on China developer stocks.
Both Hong Kong and mainland bourses saw automakers and their supply chain companies make gains following the unveiling of new incentive policies by the Ministry of Commerce to boost consumption in the auto sector. XPeng (09898:xhkg) recorded a 5.3% increase. Chinese internet companies also outperformed, with Meituan (03690:xhkg) rising by 2.2%, Kuaishou (01024:xhkg) up by 2.8%, and Bilibili (09626:xhkg) adding 4.6%. PetroChina (00857:xhkg) advanced 2.7%, reaching a new high last seen in 2018.
The US dollar was modestly higher on Friday after steep fall on Thursday following a spike in jobless claims which eased fears that the Fed could tighten again this week. Canadian dollar was volatile on weak Canadian jobs data as unemployment rate rose and average hourly earnings for permanent workers ticked down. But focus remains on US CPI and Fed meeting this week. Hotter-than-expected Norwegian inflation saw NOK in strong gains on Friday. NZDUSD also rose above 0.6120 with AUDUSD above 0.6700 amid expectations of China stimulus. USDJPY remains stuck between 138.50-140 despite Friday’s surge in short-end yields.
Saudi’s Energy Minister said that they went through a comprehensive reform to achieve the OPEC+ agreement and they are working against uncertainty and sentiment, as well as noted that Saudi and OPEC+ are more interested in doing a regulator job. This is probably another hint that the cartel is trying to combat short sellers after recent output cuts failed to have the desired effect of higher prices. Goldman Sachs slashed its December Brent forecast to $86 /bbl (from previous estimate $95). Oil prices slumped further by 1.5% on Friday and WTI was seen sliding below $70 mark in early Asian hours while Brent was below $75.
Gas prices in Europe shot up higher on Friday to close in their first weekly gain since March as hotter weather forecasts signalled stronger demand than previously expected amid signs of budding competition from Asia as it faces a heatwave. Benchmark TTF jumped above EUR 33 per megawatt-hour, up more than 23% on the session and 35% for the week. However, recently Eurozone has confirmed a technical recession and if fears of a global slowdown accelerate, industrial demand could weaken and any price spikes in gas prices could remain temporary.
China's producer price deflation worsened in May, with the PPI slumping by 4.6% Y/Y. This decline exceeded expectations of -4.3% and surpassed the -3.6% recorded in April. The intensified deflation was driven by a broad-based decline in commodity prices, with significant drops seen in various sectors. The mining industry registered an 11.5% Y/Y decrease, the raw materials sector dropped 7.7%, and the processing sector declined by 4.6%. Additionally, the oil and gas extraction industry experienced a widening deflation, reaching -19.1% Y/Y in May compared to -16.3% in April.
In contrast, China's Consumer Price Index (CPI) inflation for May showed a slight increase of 0.2% Y/Y, up from 0.1% Y/Y in April, in line with market expectations. The rise in CPI was primarily driven by a smaller decrease in vegetable prices, which moderated to -1.7% Y/Y in May from a significant decline of -13.5% in April. Excluding food and energy, core CPI growth slowed to 0.6% Y/Y in May from 0.7% in April, while services CPI growth softened to 0.9% Y/Y from 1% Y/Y. Overall, the sharp fall in PPI and the modest increase in CPI highlight the presence of deflationary pressures in the Chinese economy.
Japan’s May PPI entered deflationary territory to come in at -0.7% MoM from +0.3% last month, missing expectations of -0.2% MoM. On YoY bases also, PPI came in softer-than-expected at 5.1% from 5.9% previously, relieving pressure on Bank of Japan to recalibrate its easy monetary policy. Bank of Japan (BOJ) Deputy Governor Masazumi Wakatabe was on the wires this morning saying don’t expect a change from BOJ at the June meeting.
Days after Ukraine's counteroffensive was widely reported to have begun in international press reports, currently concentrated in four areas of the east and south, President Volodymyr Zelensky appeared to confirm that it is indeed in progress for the first time in weekend statements by saying that "counteroffensive and defensive actions are being taken in Ukraine."
NIO (09866:xhkg) reported Q1 revenue of RMB10.7 billion, which was below the EV maker’s previous guidance of RMB 10.9-11.5 billion. A gross margin of 1.5% represented a 2.4pp decline from the previous quarter and much below the consensus estimate of 7.3%. The operating margin worsened to -47.9%, a 5.9pp decline from the previous quarter. The delivery of 31,041 vehicles came in at the low end of the guidance of 31,000-33,000 vehicles. The management guides for Q2 deliveries of 23,000-25,000 units and said that gross margins will rise to double-digit for Q2 and 15% for Q3. However, the management pushed the break-even target by a year to Q4 2024, from the previously estimated Q4 2023.
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