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Main U.S. indexes end green: Nasdaq out front, up ~0.7%
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Materials lead S&P 500 sector gainers; utilities weakest group
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Dollar dips; gold up slightly; crude up >1%, bitcoin up
>3%
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U.S. 10-Year Treasury yield rises to ~3.50%
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U.S. STOCKS DIGEST DATA DRAG, DEBT-CEILING DILEMMA, RISE (1602 EDT/2002 GMT) The Nasdaq Composite rose on Monday, while the S&P 500 index posted a small rise, and the Dow Jones Industrial Average eked out a gain. This despite manufacturing data that amplified worries of a slowdown in the economy, and nothing tangible yet on a deal to raise the U.S. debt limit as a deadline looms. Indeed, the Federal Reserve's Empire State Manufacturing index came in well below estimates, and U.S. House Speaker Kevin McCarthy warned on Monday that there has been "no movement" toward an agreement. President Biden is to meet lawmakers on Tuesday for more debt talks. Meanwhile, markets also had plenty of Fed-speak to digest.
Raphael Bostic, the president of the Federal Reserve Bank of Atlanta, said Monday he does not expect any interest-rate cuts this year because inflation is likely to be stickier than those in markets believe, and if anything "we may have to go up". Additionally, Minneapolis Federal Reserve Bank President Neel Kashkari on Monday said the U.S. labor market is still hot, and inflation is "much much too high" despite the Fed's interest-rate hikes to date. However, Chicago Federal Reserve Bank President Austan Goolsbee said on Monday that his decision to support an interest rate hike at the U.S. central bank's most recent meeting in May was a "close call" as he weighed the impact of credit tightening from recent bank stresses. Small caps , chips and banks were among the day's outperformers. With this, value outpaced growth . Here is a snapshot of where markets stood just shortly after the 4 PM close:
(Terence Gabriel)
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THE ONGOING BANKING CRISIS EQUATES TO THIS IN TERMS OF FED RATE HIKES (1331 EDT/1731 GMT) One way to calculate how much the ongoing banking crisis corresponds to in Fed hikes is to look at how much borrowing costs have increased for regional banks and money center banks since Silicon Valley Bank collapsed. According to Torsten Slok, chief economist and partner, at Apollo Global Management, since SVB failed, IG credit spreads have widened 200bps for regional banks and 50bps for diversified banks. And for all banks, the spread widening has stayed at a new higher level because many banks have been downgraded.
Slok says that spreads first moved up to a higher level
after SVB's downfall, and then ratcheted up again after the FRC
collapse. To him, this shows that the ongoing banking crisis is
having a permanent negative impact on the economy.
In other words, Slok says that the increase in borrowing
costs since SVB failed corresponds to a 200bp permanent Fed hike
for regional banks and 50bp permanent Fed hike for large banks.
He adds that weighing these estimates together using small
and large bank shares of loans and leases, respectively, gives
an economy-wide Fed tightening of a bit more than 100bps for the
banking sector as a whole.
"In short, the jump in funding costs for banks is permanent,
and it has become a lot more expensive for many banks to run
their business, and the banking crisis is not over."
(Terence Gabriel)
*****
T-BILLS VOLATILE, BUT IN DEFAULT TREASURIES WOULD BE IN
FAVOR (1237 EDT/1637 GMT)
Concerns that the Congress will drag its heels on raising
the U.S. debt ceiling has created large distortions in Treasury
bills, but in the worst-case scenario of a default Treasuries
will likely be generally in favor.
Yields on one-month bills , which come due when
the Treasury Department is at risk of running out of cash, are
trading near a record high of 5.811% reached last week, while
two-month bill yields are down from a record 5.547%
reached earlier this month at 4.901%, but remain subject to more
volatility.
The two-month bill yields went as low as 4.526% and as high
as 5.145% in just one trading session last Thursday.
While a default is still viewed as unlikely, investor
anxiety over possible missed payments may grow in coming weeks
if the issue is not resolved.
Fixed income analysts at JPMorgan, meanwhile, surveyed
investors and found that Treasuries would be a favorite place to
park cash in the scenario of a technical default.
“On average, investors expect Treasuries would rally, IG
credit spreads would widen, and the dollar would underperform
relative to safe haven currencies,” the bank said.
U.S. President Joe Biden said on Sunday he expects to meet
with congressional leaders on Tuesday for talks on a plan to
raise the nation's debt limit.
(Karen Brettell)
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ARE INVESTORS BETTING THAT THE FED WILL CUT RATES TO HELP BANKS? (1145 EDT/1545 GMT) Fed funds futures traders are pricing in rate cuts by the Federal Reserve this year, however, this may be driven by a misconceived expectation that the U.S. central bank will act to relieve pressure on banks. The market is pricing in around 67 basis points of rate cuts by year-end, and 143 basis points of rate reductions by next May. However, “the cuts are really fueled by what the Fed is going to have to do to try to help the banking system out,” said Thomas Simons, a money market economist at Jefferies. Investors are concerned that recent stress in the U.S. regional banking system may continue to spread, after depositors fled smaller banks in the wake of the collapse of Silicon Valley Bank in mid-March. The dramatically inverted Treasury yield curve is also negative for banks, which typically rely on borrowing at cheaper short-term rates and lending at higher long-term rates. “In my view, if you’re going to need to use rates to help the banking system, you’re not cutting 1,2,3, times, you’ve got to cut 300 basis points - you’ve got to make front-end rates dramatically lower than they are right now and steepen out the curve, and they’re not going to do that,” given that inflation remains above target, Simons said.
(Karen Brettell)
*****
ELEVATOR GOING DOWN: EMPIRE STATE TUMBLES (1103 EDT/1503
GMT)
Factory activity in New York State has taken a rather
spectacular swan dive this month.
The New York Fed's Empire State manufacturing survey plummeted 42.6 points in May, to a dire reading of
-31.8 from April's 10.8, the state's manufacturing sector
slamming on the breaks and throwing itself into reverse.
An Empire State reading below zero signifies monthly
contraction, and consensus called for a much shallower pull-back
at -3.75.
Plunging new orders shoved the headline number off the
cliff, sliding to -28 from 25.1.
On the bright side - it's there if you dig for it -
employment contracted at a shallower rate, to -3.3 from -8.0.
And six-month expectations warmed to 9.8 from 6.6.
But the prices paid element - an inflationary indicator -
also gained heat, rising 1.9 points to 34.9.
The manufacturing sector has had to contend with a demand
shift to services from manufacturing, tighter monetary policy as
central banks continue to tackle inflation, and economic
uncertainties.
"The May plunge brings it much closer in line with the other regional surveys, which point to outright declines in real non-residential fixed investment," writes Kieran Clancy, senior U.S. economist at Pantheon Macroeconomics. "Hopes for a sustained recovery in manufacturing rest on the pull to global industry from China’s post-Covid recovery, given the intense pressure on the domestic economy from the Fed’s actions and now the banking crisis."
The Philly Fed data on Thursday will provide a more complete portrait of Atlantic region manufacturing. On Tuesday, the Federal Reserve's industrial output/capacity utilization report will provide further insight into the health of U.S. goods producers, and the Commerce Department's retail sales data for April will shed some light on downstream demand.
Wall Street is showing little conviction as wrangling on Capitol Hill showed little progress in debt ceiling negotiations.
Banks and small caps are having a better day than most.
(Stephen Culp)
*****
U.S. STOCKS TENTATIVE IN EARLY TRADE (0945 EDT/1345 GMT) U.S. stock indexes are little changed early on Monday. That said, there is optimism over the potential for a deal to raise the U.S. debt limit, though investors may remain cautious as they await comments from Federal Reserve policymakers through the week. President Joe Biden said over the weekend he expects to meet with congressional leaders on Tuesday and remained optimistic about agreeing on a deal to raise the nation's $31.4 trillion borrowing limit. Investors will also be tracking speeches by a host of Federal Reserve officials this week, including Chair Jerome Powell on Friday, for clues on potential rate cuts this year. A majority of S&P 500 sectors are lower, though most changes are modest. Value is outpacing growth in early trade. Growth has outperformed value in nine of the past 10 sessions.
Here is an early trade snapshot:
(Terence Gabriel)
*****
S&P 500 INDEX: OUTLOOK STILL CLOUDY (0900 EDT/1300 GMT)
The S&P 500 index is virtually flat over the past six
weeks, up just 0.3% since late March.
Indeed, the SPX continues to struggle just shy of some major
chart barriers. And last week's 0.3% dip provided little clarity
for traders as they remain focused on one big billowy cloud on
the horizon.
The SPX hit a high last week of 4,154.28 before ending
Friday at 4,124.08. Thus, the benchmark index continues to flirt
with the upper edge of the weekly Ichimoku cloud, which resides
around 4,155:
Ichimoku cloud is technical indicator which displays support
and resistance, identifies trends, and measures momentum.
Utilizing midpoints of ranges, a number of lines are generated.
Two of these lines are used to create cloud boundaries. The
entire cloud is shifted forward in time in order to provide a
glimpse of future support and resistance.
Once the SPX broke below the cloud in May of last year, it
has only ended back above it once, on a weekly closing basis.
Rallies failed in early-June of last year, again in mid-August
and mid-December, as well as in early-February of this year.
The SPX managed to end above the upper edge of the cloud on
April 28. However, since then it has fallen two-straight weeks.
Thus, the 4,155 level remains a key hurdle.
Add in additional resistance at the early-February high at
4,195.44, the 23.6% Fibonacci retracement of the March
2020-January 2022 advance at 4,198.70, the 100-week moving
average, which ended Friday at 4,200.75, and the Fed-Chair
Powell August-26 Jackson Hole speech high at 4,203.04, and bulls
may have their heads in the clouds if they expect the SPX will
be able to continue to advance.
That said, clearing these barriers will have the potential
to suggest that its advance is only strengthening.
Among nearby support levels are the rising 50-day moving
average, which ended Friday at about 4,058, and last week's low
at 4,048.28.
(Terence Gabriel)
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(Terence Gabriel is a Reuters market analyst. The views
expressed are his own)
