Macro: Sandcastle economics
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Summary: Markets are in a holding pattern once again, edging a bit lower ahead of today's US April CPI release. A US 3-year treasury note auction yesterday saw record indirect bidding, normally associated with foreign demand, possibly suggesting risk aversion, somewhat ironically as the ongoing stand-off in the US debt ceiling talks remains a cause for concern. Sterling has pulled to new highs for the year against the Euro ahead of tomorrow’s Bank of England meeting.
The energy in US equity market is still low with VIX below 18 and the S&P 500 futures daily trading ranges coming down as everyone is waiting for the US April inflation data later today. Recent inflation data from Europe could suggest that inflation in the US will remain high and the key risk for equities today is an upside surprise to the inflation figures.
Action in currencies was rangebound yesterday, although EURUSD suffered some weakness as the pair tested the range low of the past more than two weeks below 1.0950 before finding support and USDJPY spilled back above 135.00 and will likely be very sensitive to any US CPI release surprises today if these also feed into a strong reaction into the treasury market (JPY strength on lower yields and vice versa). Sterling has been strongly bid ahead of the Bank of England meeting tomorrow, with EURGBP breaking down to new lows for the year below 0.8700 yesterday.
Crude oil prices went through another roller coaster session on Tuesday, being pressured early on after China import data showed an 18% MoM drop in crude imports, before bouncing back after the US administration announced plans to replenish its strategic petroleum reserve (SPR). The SPR is currently at a four-decade low after the government withdrew 180m barrels following Russia’s invasion of Ukraine. Together with OPEC’s attempt to actively manage supply, a soft floor under the market could be emerging. Meanwhile, wildfires in Canada have shut 350kbd of oil and gas production according to Rystad. Ahead of EIA’s stock report the API reported a 3.6m barrel increase in crude oil stocks. Overall, however, risk appetite may fade ahead of the US CPI print with Brent yet to break $77.47, the 38.2% retracement of the recent selloff, while WTI is finding resistance at $73.60.
Gold traders remain in bullish mood ahead of today’s US CPI print, the outcome of which could prove key to the next FOMC rate move. Prices have held up this week despite seeing short-term rates traders adjust lower their expectation for rate cuts this year while the dollar and bond yields have moved higher. A hotter than expected inflation report (see below) may raise the risk of another rate hike and a further delay to a gold-supportive peak in rates. Elsewhere, the looming debt ceiling crisis, the risk of an imminent recession (see Druckenmiller’s prediction below) and a drop in small business optimism to a decade low are all supportive factors. Support at $2007 followed the $1986 while resistance remains firm above $2050.
US yields extended a bit higher still yesterday despite record bidding from indirect bidders (often associated with foreign demand) at a US Treasury auction of 3-year t-notes yesterday. That auction had the highest bid-to-cover ratio since early 2018. Next step is today’s US April CPI release as yields for the 2-year and 10-year benchmarks trade just above mid-range of the last six weeks.
Airbnb reported Q1 revenue of $1.82bn vs est. $1.79bn up 21% y/y and adjusted EBITDA of $262mn vs est. $259mn as travel activity continues to rebound from the pandemic years. While Q1 figures were in line with consensus it was the Q2 revenue guidance of $2.35-2.45bn vs est. $2.42bn that spooked investors as it suggests that demand maybe is beginning to slow amid inflation and higher interest rates. Airbnb announced a $2.5bn buyback programme.
The Japanese carmaker reported fiscal year results (ending 31 March) hitting a record with 11.4mn units sold and operating income of JPY 3trn in line with estimates. The carmaker is saying that the global semiconductor situation has improved, and cost reductions are still a key focus over the next year.
Vestas, one of the world’s largest wind turbine makers, reports this morning Q1 revenue of €2.83bn vs est. €2.51bn and better than expected Q1 EBIT, but the good results are very much about timing of revenue and costs. The fiscal year revenue guidance is unchanged at €14-15.5bn vs est. $15bn and Vestas continues to guide EBIT margin of –3% to +2% signalling low visibility.
US President Biden and House Speaker Kevin McCarthy met yesterday at the White House to discuss the debt ceiling, which must be raised for the US to avoid defaulting on its debt. IT was the first direct discussion between the two sides since February, but no progress was reported in the talks, though they made plans for a new round of talks. “I didn’t see any movement” said McCarthy, in reference to the White House position. The Biden administration may hope the two sides can agree on at least a short term raise of the debt ceiling to give further time for negotiation, but McCarthy doesn’t appear receptive to that idea. The next meeting between the two sides will be on Friday.
The famed investor said that issues like the decline in US retail sales and the credit contraction due to turmoil impacting regional banks could lead to a US recession starting as early as this quarter and that the US economy will see a hard landing. “I am not predicting something worse than 2008” he said adding later that “it’s just naive not to be open-minded to something really, really bad happening.”
The NFIB measure of small business optimism fell to 97.4 in April from 98.7 in March, hitting a decade low. The report noted that over 60% of surveyed small businesses continued to face difficulties in finding experienced workers in April. About 17% plan to create new jobs in the next three months, which is above March when the banking turmoil started. But wage inflation signals were still apparent as 40% of the surveyed firms reported raising wages in April and 21% plan to raise in the next three months. The report doesn’t show any outright recession concerns, while inflation still needs to stay on a watch.
Citing “people present at the talks”, a Bloomberg article says that Italy will likely pull out of its participation in China’s Belt and Road pact, though a final decision has yet to be taken. Italy is the only G7 country in the pact and will have to announce an exit if its membership is not to be automatically renewed in 2024.
Ryanair announced it would buy up to 300 of Boeing’s 737 Max aircraft for delivery between 2027 and 2033 in a deal with a theoretical value of some $40 billion, based on the list price of the aircraft. Half of the orders are firm, and half are options. Ryanair says around half of the planes would replace aging planes in its existing fleet in coming years, but the rest of the planes would allow the company to expand its passenger traffic by some 80% by early 2024. Boeing shares closed over 2% higher yesterday in New York.
The next macro calendar event risk of note is today’s US April CPI release, with the consensus expectations looking for +0.4%/5.0% for the headline and +0.3%/+5.5% for the core, Ex Food and Energy, reading. Markets continue to price that the Fed is finished with its tightening cycle and will cut as soon as September (with low odds even of a July FOMC meeting rate cut), and the next two to three months of inflation and employment-related economic data will be crucial for the outlook for yields. The FOMC will also have a chance to look at the May CPI before the June 14 FOMC Meeting.
Today’s US earnings focus is Disney expected to report FY23 Q2 earnings (ending 31 March) after the US market close with analysts expecting revenue growth of 13% y/y and operating profits to decline from last year on increased cost pressures. Read our earnings preview for this week’s earnings from Airbnb, Disney, and Richemont here.
1230 – Canada Mar. Building Permits
1230 – US Apr. CPI
1430 – US Weekly DoE Crude Oil and Product Inventories
1600 – Switzerland SNB President Jordan to speak
1700 – US 10-year Treasury Auction