Month: May 2024

By Michael Every of Rabobank

Higher for Longer Anxiety

Markets are very, very nervous going into the FOMC decision. The Wall Street Journal’s Timiraos tells us the Fed’s message will be “higher for longer”, language that had been dumped in December.

It’s another wait-and-see meeting for the Fed, but this time, the questions are likely to be tilted in the direction of filling out the Fed’s reaction function for upside risks on inflation and wages rather than downside risks or benign inflation. https://t.co/lc3jPx7rUs

— Nick Timiraos (@NickTimiraos) April 30, 2024

Moreover, if the Fed sees more hot data –following a jump in the Employment Cost Index, US house price inflation rising again, and a New York Fed wage tracker showing pay hikes staying around 5% y-o-y– then while they may not raise rates again, they will certainly remove some of the implied cuts in the next dot plot; in his words, that would force yields higher along the curve in order to tighten financial conditions. So, higher yields anxiety.

Meanwhile, former President Trump give an interview to Time magazine that underlines how remarkably different, and radical, a ‘Trump 2’ would be. In particular, markets should note:  

Let’s shift to the economy, sir. You have floated a 10% tariff on all imports, and a more than 60% tariff on Chinese imports. Can I just ask you now: Is that your plan?

It may be more than that. It may be a derivative of that. A derivative of that. But it will be somebody – look when they come in and they steal our jobs, and they steal our wealth, they steal our country.

When you say more than that, though: You mean maybe more than 10% on all imports?

More than 10%, yeah. I call it a ring around the country. We have a ring around the country. A reciprocal tax also, in addition to what we said. And if we do that, the numbers are staggering. I don’t believe it will have much of an effect because they’re making so much money off of us. I also don’t believe that the costs will go up that much. And a lot of people say, “Oh, that’s gonna be a tax on us.” I don’t believe that. I think it’s a tax on the country that’s doing it…

Mr. President, most economists—and I know not all, there isn’t unanimity on this—but most economists say that tariffs increase prices.

Trump: Yeah.

Are you comfortable with additional inflation?

Trump: No, I’ve seen. I’ve seen – I don’t believe it’ll be inflation. I think it’ll be lack of loss for our country. Because what will happen and what other countries do very successfully, China being a leader of it. India is very difficult to deal with. India – I get along great with Modi, but they’re very difficult to deal with on trade. France is frankly very difficult on trade. Brazil is very difficult on trade. What they do is they charge you so much to go in. They say, we don’t want you to send cars into Brazil or we don’t want you to send cars into China or India. But if you want to build a plant inside of our country, that’s okay and employ our people. And that’s basically what I’m doing. And that’s – I was doing and I was doing it strongly, but it was ready to really start and then we got hit with COVID. We had to fix that problem.

So, higher tariffs and, for some, higher inflation anxiety. And it’s not just from Trump: following yesterday’s Global Daily title of ‘Beg, Borrow, or Steel’, Treasury Secretary Yellen flagged higher US tariffs are needed vs. Chinese steel dumping; and the White House wants ethanol aviation fuel subsidies which will boost corn prices – you can tell it’s a US election year.  

Meanwhile, Trump may want to end Fed independence (vs. telling the world rate cuts are coming by end year, and placing doves, not hawks, on the FOMC after a series of scandals). Would this imply “bigly” rate cuts, or open the door to the hybrid higher-rates-for-some/lower-for-others monetary/fiscal/industrial policy I have hypothesized as the only logical solution to the mess we are in? Either way, it would be “bigly” for all asset classes; more so when another headline suggests Trump wants to punish the BRICS who try to dedollarise with high tariffs.

Meanwhile other things are likely seeing central banks reach for their Valium:

• The West has K-shaped, unequal, unhappy, stagflationary, more emerging-market economies with too much debt and too few good options.
• Not only the yield curve, but an entire generation is lying flat or inverted in calling for violent revolution or communism in the US; and, at elite universities, to the approval of faculty, administrators, and authorities. As legitimate protest metastasizes into a ‘tentifada’ or, as Alan Dershowitz calls it, “Mein Kampus”, a Harvard-Harris poll shows 43% of US 18-24 year-olds support Hamas over Israel, and a majority want *Iran* to have a nuclear weapon.
• High geopolitical tensions mean protectionist, inflationary, Hamiltonian rearmament; yet the West currently can’t get the Suez Canal open to its maritime commerce again because of the Houthis; and Poland confirms it’s asked the US to let it host nuclear weapons, which could lead to an EU Cuban Missile Crisis.

In 2019, I suggested we were on the cusp of an ‘Age of Rage’ that risked injecting politics into central banks: within 2 years, the Fed was talking about social justice, which some think perhaps played a partial role in the FOMC’s delayed recognition that rate hikes were necessary. In 2024, a former ECB president is calling for “radical” change, a US presidential candidate may back the end of Fed independence, and the Wall Street elite’s kids want global revolution. Where will things sit in another five years? “25bps lower” is not an answer that captures the real tail risks. However, not many want to ‘go there’, which leads me to high anxiety.

In Mel Brooks’ High Anxiety, psychologist Richard Thorndyke and belle Victoria Brisbane must pass through San Francisco Airport, where the police are looking for them. To hide, they wear clothes from charity and do an impression of many grandparents, as Thorndyke urges Victoria: “Be loud and annoying. Psychologically, when you are loud and annoying, people don’t notice you.” Indeed, when the metal detector is triggered by a forgotten gun, Thorndyke avoids arrest thus:

Thorndyke: “What is this, a gameshow? What did I win, a Pinto?”

Security: “I’m sorry sir, we’re going to have to search you.”

Thorndyke: “Please Sir, what did I do? What did I do? What’s to my crime?”

Security: “You beeped.”

Thorndyke: “I beeped! I beeped! Take me away! Take me back to Russia! Put me in irons! I beeped! The mad beeper is loose! Take away the beeper! Take me away!”

Security: “It’s alright! It’s alright, please go! Please go!”

We are now living that movie. Tipping-points loom in our ecology, economy, society, theology, psychology, demography, national security – and, yes, markets. Yet many ignore those “loud and annoying” messages right up until the likes of Timiraos spell it out for them. As such, aren’t those focused solely on the next rate cut the real “mad (25) beepers”?

Our Australia/New Zealand strategist Ben Picton will make some very, very nervous: he’s revised his RBA policy rate forecast to include two further 25bps hikes (in August and November) to reach a terminal rate of 4.85%, and has removed future cuts in accordance with our house view that Trump will win the US election and enact tariffs. Those not prepared to make those kind of tough market calls may react as in the High Anxiety shower scene, where the attached clip misses the punchline: “That kid gets no tip.” But I think Ben just gave you a great tip.

After several months of relatively boring JOLTS prints, this morning Janet Yellen’s favorite labor market indicator once again got exciting, and not in a good way.

Starting at the top, according to the March JOLTS reported, job openings unexpectedly tumbled by 325K – the biggest drop since October 2023 – from an upward revised 8.813 million in February to just 8.488 million, far below the 8.690 million expected – and the lowest number since February 2021 when it last printed below 8 million.

The 192K miss to estimates of 8.690 million, was the biggest since last October.

According to the DOL, in March job openings decreased in construction (-182,000) and in finance and insurance (-158,000), but increased in state and local government education (+68,000) because when all else fails, just “hire” more government zombies, ideally in the form of unionized illegal aliens to boost wages and inflation.

The kicker: construction jobs openings plunged from 456K to 274K, a 182K one-month drop and the biggest on record!

In the context of the broader jobs report, in March the number of job openings was 2.059 million more than the number of unemployed workers (which the BLS reported was 6.429 million), down significantly from last month’s 2.355 million and the lowest since June 2021.

Said otherwise, in March the number of job openings to unemployed dropped to 1.32, a sharp slide from the February print of 1.36, matching the lowest level since August 2021 and almost back to pre-covid levels of 1.3.

But even more interesting than the drop in job openings was the number of quits: here we find that the number of people quitting their jobs, an indicator closely associated with labor market strength as it shows workers are confident they can find a better wage elsewhere – unexpectedly plunged by 198K, the biggest montyly drop since last June, to just 3.329 million the lowest number since January 2021!

But perhaps the most notable twist, is that amid the stagnant level of job openings, not only did the number of quits plunge – as workers no longer expect to find better paying jobs elsewhere – but so did the number of hires, which cratered by 281K to just 5.500 million – the lowest since Jan 2018 (excluding the record one-month plunge due to covid), and is now well below pre-covid levels.

Needless to say, a freeze in hiring is always the precursor to a wholesale collapse in the labor market, which we expect will materialize in 2-3 months, but since the election  will determine what econ data is published, expect the US economy to be in freefall the moment Trump wins the election.

It’s not just us warning on this metric: the chief economist as Glassdoor, Daniel Zhao, echoes our warning that “employers are hesitant to hire & workers are hesitant to switch to a new job”

Softness in the hires & quits rates are a concern: The hires rate fell to 3.5%, matching the lowest post-pandemic level. The quits rate fell to 2.1% is at its lowest since Aug 2020.

A sign that employers are hesitant to hire & workers are hesitant to switch to a new job

2/ pic.twitter.com/ZfGaiJh82I

— Daniel Zhao (@DanielBZhao) May 1, 2024

His conclusion: “low hires, quits and layoffs are an unusual combination that points to a certain “lock-in” in the job market. For the Fed, that is likely to tamp down wage growth driven by job switchers even if it doesn’t slow net jobs growth.”

Low hires, quits and layoffs are an unusual combination that points to a certain “lock-in” in the job market. For the Fed, that is likely to tamp down wage growth driven by job switchers even if it doesn’t slow net jobs growth.

6/6

— Daniel Zhao (@DanielBZhao) May 1, 2024

Finally, no matter what the “data” shows, let’s not forget that it is all just estimated, and it is safe to say that the real number of job openings remains still far lower since half of it – or some 70% to be specific – is guesswork. As the BLS itself admits, while the response rate to most of its various labor (and other) surveys has collapsed in recent years, nothing is as bad as the JOLTS report where the actual response rate remains near a record low 33%

In other words, more than two thirds, or 70% of the final number of job openings, is estimated!

And at a time when it is critical for Biden to still maintain the illusion that at least the labor market remains strong when everything else in Biden’s economy is crashing and burning, we’ll let readers decide if the admin’s Labor Department is plugging the estimate gap with numbers that are stronger or weaker (we already know that they always get revised lower next month).

Oil prices extended losses overnight (3rd day lower in a row) following API’s report showing an unexpected crude build. Rising stocks would add to bearish headwinds for prices driven by hopes that peace (or some such variant of it) may break out in the Middle East.

“The potential for a cease-fire agreement between Israel and Hamas has eased concerns of an escalation of the conflict and any possible disruptions to supply,” ANZ Banking Group Ltd. analysts Brian Martin and Daniel Hynes said in a note.

“Continued signs of inflation also raised concerns about demand for crude oil” ahead of the US driving season, when gasoline consumption rises.

Additionally, OPEC’s crude production stayed steady last month, leaving the group’s latest cutbacks incomplete.

The Organization of Petroleum Exporting Countries pumped 26.81 million barrels a day in April, about 50,000 a day less than the previous month, according to a Bloomberg survey. Minor increases by Libya and Iraq were offset by reductions in Iran and Nigeria.

As a result, supply curbs agreed by the group and its allies at the start of the year to avert a surplus are still unfinished

Will the official data confirm API’s unexpected build…

API

• Crude +4.91mm (-1.5mm exp)

• Cushing +1.48mm

• Gasoline -1.48mm (-1.2mm exp)

• Distillates -2.19mm (+400k exp)

DOE

• Crude +7.265mm (-1.5mm exp)

• Cushing -1.089mm

• Gasoline +344k (-1.2mm exp)

• Distillates -732k (+400k exp)

The official data showed an even bigger crude build than API (and stocks at Cushing also rose significantly)…

Source: Bloomberg

The Biden admin added another 594k barrels to the SPR last week…

Source: Bloomberg

US Crude production was flat at 13.1mm b/d…

Source: Bloomberg

WTI was hovering around $81.25 (off the morning lows) ahead of the official data and extended losses after the big build…

Finally, we note that oil options are signaling that traders are becoming less worried about conflict in the Middle East driving crude prices higher.

About 1,000 more Brent put options – which give the holder the right to sell at a pre-determined price and time – changed hands than bullish calls on Tuesday. That’s the first time put volumes have outnumbered calls since late March.

Puts are trading at their biggest premium to calls since the end of March.

Authored by Paul Joseph Watson via modernity.news,

The View host Whoopi Goldberg said she was “enraged” over Donald Trump asserting that there is “an anti-white feeling in America.”

Goldberg made the remarks as she angrily glared at the camera.

“This is my favorite, and I’m gonna tell you before I say it that it enraged me,” she said before going on to quote Trump, who said, “There is a definite anti-white feeling in the country right now.”

‘The View’ Whoopi Goldberg has a MELTDOWN and says she is “enraged” by Donald Trump saying that “There is a definite anti-White feeling in the country”

“Yeah, Sir. Nobody in your family was hung. Nobody in your family was chased because of the color of their skin. How dare you?… pic.twitter.com/jZoeWW5QUD

— Unlimited L’s (@unlimited_ls) April 30, 2024

Apparently, Trump pointing out a manifestly factual phenomenon is enough alone to infuriate Goldberg and the audience, which murmured with sanctimonious discontent.

“That’s what he said!” continued Goldberg, before going on to suggest that there can’t be any “anti-white feeling” until white people are literally being lynched.

“Yeah, Sir. Nobody in your family was hung. Nobody in your family was chased because of the color of their skin. How dare you? There’s no anti-white issue here. You are perpetrating anti-humanist issues here,” she said.

One respondent on X provided a comprehensive response cataloguing dozens of examples of where the media, academia and major institutions have engaged in deliberate anti-white sentiment.

Whoopi and MSNBC are part of this Mockingbird Media campaign to vilify and dehumanize white people.

Their gaslighting can’t erase what we’ve seen with our own eyes. For years now. pic.twitter.com/UBkgtWmSoX

— LittleRedRidingPills (@TheEvmeister) April 30, 2024

Another warned that Goldberg’s rage is another example of how “they’re saying the quiet part out loud.”

They’re saying the quiet part out loud and we should be thankful. Let nobody be in any doubt that the new America is a nation founded on the desire racial revenge. It’s a country no different from Zimbabwe and South Africa. If things continue, the results will be the same. https://t.co/c602K2i7Zn

— RAW EGG NATIONALIST (@Babygravy9) May 1, 2024

Others noted how absolutely nobody in Goldberg’s family was hanged, rendering her entire argument obsolete.

As we previously highlighted, Goldberg’s co-host Sunny Hostin faced embarrassment when it was revealed that her ancestors were actually white European slave owners.

Your support is crucial in helping us defeat mass censorship. Please consider donating via Locals or check out our unique merch. Follow us on X @ModernityNews.

While ‘hard’ data has been improving recently (albeit then downwardly revised a month later), it is the ‘soft’ survey data that has collapsed amid Bidenomics.

Source: Bloomberg

And this morning continued that trend as S&P Global’s US Manufacturing PMI (survey) fell from 51.9 in March to 50.0 as the final print for April (49.9 flash). ISM’s Manufacturing survey also missed, dropping from 50.3 to 49.2 (contraction).

Source: Bloomberg

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said:

“Business conditions stagnated in April, failing to improve for the first time in four months and pointing to a weak start to the second quarter for manufacturers. Order inflows into factories fell for the first time since December, meaning producers had to rely on orders placed in prior months to keep busy.

“However, there are some encouraging signs. The drop in orders appears to have been largely driven by reduced demand for semi-manufactured goods – inputs produced for other firms – as factories adjust their inventories of inputs. In contrast, consumer goods producers reported a further strengthening of demand, hinting that the broader consumer-driven economic upturn remains intact.

“Producers on the whole also seem confident enough in the business outlook to continue adding to payroll numbers at a pace that compares well with the average seen over the past two years, investing further in operating capacity.

But, under the hood it was not pretty – ISM New Orders tumbled, Employment rose modestly, but Prices Paid soared (to their highest since June 2022)…

Source: Bloomberg

Prices charged for goods rose at a slower rate than the 11-month high seen in March. But, as S&P Global notes, the rate of increase nevertheless remains elevated by historical standards – and well above the average seen in the decade prior to the pandemic – as firms continued to pass higher commodity prices on to customers.

However, input costs increased sharply, with the rate of inflation quickening for the second consecutive month. Higher prices for oil and metals were mentioned in particular.

So, stagnating growth and sharply rising input costs… Stagflation signals everywhere.

Having already revealed its borrowing estimates for Q2 and Q3 on Monday, where we learned that the Treasury expects to sell $41BN more debt than previously expected in Q2, but offset by a below-estimate $847BN in Q3 (which pushes TSY cash levels to $850BN, so really $747BN assuming $750BN in quarter end cash), moments ago the Treasury published the balance of its Quarterly Refunding Announcement where there were also no surprises as Janet Yellen left the quarterly issuance of longer-term debt unchanged on Wednesday as widely expected, while repeating what it said last quarter namely that “based on current projected borrowing needs, Treasury does not anticipate needing to increase nominal coupon or FRN auction sizes for at least the next several quarters.” Finally, the Treasury announced that its first program to buy back existing securities in more than two decades will kick off this month with the first operation intended for May 29, and also unveiled that 6 week cash management bills would be converted into a regular benchmark bill.

Here are the details:

The Treasury Department said in a statement Wednesday it will sell $125 billion of securities at its so-called quarterly refunding auctions next week; the proceeds will be used to refund $107.8 billion of Treasury notes maturing on May 15, 2024.  This issuance will raise new cash from private investors of approximately $17.2 billion.  The securities are:

• A 3-year note in the amount of $58 billion, unchanged from the April auction, and up $4 billion from the February refunding auction
• A 10-year note in the amount of $42 billion, up $3 billion from the April auction, and unchanged from the February refunding auction
• A 30-year bond in the amount of $25 billion, also up $3 billion from the April auction, and unchanged from the February refunding auction

While the 10 and 30-year auctions saw $3BN increases in total notional from the April level, Two-, three-, five- and seven-year auction sizes were kept steady. Putting the refunding in context, the $125BN gross total compares to a peak of $126BN first reached in Feb. 2021, as auction sizes across the curve began rising in 2018 to finance tax cuts and surged in 2020 to finance the pandemic response which sent US debt into orbit.

What is much more important, however, is the Treasury’s confirmation that “based on current projected borrowing needs, Treasury does not anticipate needing to increase nominal coupon or FRN auction sizes for at least the next several quarters.”

The table below presents, in billions of dollars, the actual auction sizes for the February to April 2024 quarter and the anticipated auction sizes for the May to July 2024 quarter:

As shown above, the Treasury said the auction sizes for the May to July quarter of the 10-year note, 20- and 30-year bonds will follow the same pattern as the February to April period. The Treasury also plans to maintain May 10-year TIPS reopening auction size at $16b; will raise both June 5-year TIPS reopening by $1b as well as July 10-year TIPS new issue

“Since August 2023, Treasury has significantly increased issuance sizes for nominal coupon and FRN securities. Treasury believes these cumulative changes leave it well positioned to address potential changes to the fiscal outlook and to the pace and duration of future SOMA redemptions,” the Treasury said, a trend shown in the chart below.

All in all, this is good news for coupon issuance which some had expected would see a sizable increase this quarter with Bill issuance turning negative (on a net basis), but that has clearly not happened.

And speaking of Bills, the Treasury said that given current fiscal forecasts, it expects to increase the 4-, 6-, and 8-week bill auction sizes in the coming days to ensure sufficient liquidity to meet our one-week cash needs around the end of May, just as we said it would, to take advantage of the recent bump in the reverse repo facility.

*75 COUNTERPARTIES TAKE $505.530B AT FED REVERSE REPO OP.

That’s a LOT of Bill excess capacity, and far less coupons required

— zerohedge (@zerohedge) April 29, 2024

Then, in anticipation of the June 15th non-withheld and corporate tax date, Treasury expects to implement modest reductions to short-dated bill auction sizes during early to mid-June.  Subsequently, over the course of July, Treasury anticipates returning short-dated bill auction sizes to levels at or near the highs from February and March. 

While most of the Refunding was as expected, there were two notable surprises:

1. the introduction of the 6-week bill benchmark and
2. the launch of widely expected Treasury buybacks.

Starting with the first, the Treasury writes that given the outlook for T-bill supply over the medium term and after gathering feedback from a variety of market participants, including the primary dealers and Treasury Borrowing Advisory Committee, Treasury intends to change the regular 6-week CMB into a benchmark bill (part of the regular weekly bill issuance schedule going forward) as “Investor reception to the 6-week CMB has been strong, and elevation to benchmark status will further support demand.”

And some more details:

Over the coming quarters, Treasury plans to make necessary operational and systems changes in order to smoothly transition the 6-week CMB to benchmark status.  During this transition, Treasury will continue with weekly issuance of the 6-week CMB.  Treasury also intends to maintain the Thursday settlement and maturity cycle when the 6-week CMB becomes a benchmark bill.  Additional implementation details, including the likely timing of the first benchmark auction, will be provided at an upcoming refunding.

Even more important is that today the Treasury announced the launch of the widely anticipated Treasury buyback program with the first operation intended for Wednesday, May 29th. These operations will be aimed at “supporting market liquidity and improving cash management” but really are just a remind that the Fed-Treasury complex will never allow bond prices to plunge to dangerous levels, and whether it is buybacks or YCC, someone will always step in. Through July 2024, Treasury plans to conduct weekly Liquidity Support buybacks of up to $2 billion per operation in nominal coupon securities and up to $500 million per operation in TIPS. Treasury officials had spent more than a year analyzing the merits of buybacks and working out the structure for them.  A tentative buyback schedule is as follows:

In each operation, Treasury will seek offers for no more than 20 CUSIPs, due to temporary settlement process limitations.  Once these settlement process limitations are addressed, Treasury plans to remove the 20 CUSIP cap and move towards operation sizes consistent with its previous guidance (e.g., maximum of $30 billion per quarter across buckets for Liquidity Support).  Treasury will provide an update on this transition at the next refunding.

As an aside, the upcoming buybacl program bears little resemblance to the buybacks from more than two decades ago. Those were launched during an historic period of budget surpluses, which gave officials the luxury of retiring some outstanding, higher-interest securities.

To summarize today’s dovish QRA:

• i) no coupon size increase, as some had feared
• ii) Treasury buybacks begin, further easing concerns about where the “buyer of last resort” will come from (at least until QE restarts).

And then there is the start of QT tapering expected to be announced later today: as a reminder, pressure on the Treasury is expected to further ease when the Fed eserve slows its run-off of US government securities holdings, something many dealers see likely to be announced later on Wednesday, as the Fed indicates that instead of $60BN in Treasury the Fed allows to run off its balance sheet every month, the Fed will taper the taper (so to speak) to just $30BN before it eventually tapers it to zero. In doing so, the gross funding need will drop even further.

Fed policymakers are set to release their policy statement at 2 p.m. in Washington. Chair Jerome Powell’s subsequent press briefing may offer clues on whether officials still expect to lower interest rates later this year — something that could further help the Treasury stem its surging debt-interest bill.

Until then, however, yields are dumping and thanks to the far more dovish than some had expected Quarterly Refunding, the 10Y yields is back down to 4.64%, down from 4.69% earlier and has erased almost the entire move following yesterday’s red hot Employment Cost Index (thanks to soaring government and union wages).

And now we wait for the Fed to announce that it is tapering the taper, and sending yields tumbling even more.

CVS Health shares plunged in the premarket trading session in New York after first-quarter revenue and adjusted earnings missed Wall Street’s average expectations. The drugstore chain also slashed its full-year profit outlook, citing rising medical costs in its Medicare insurance unit. 

Here’s what CVS reported for the first quarter compared with average Wall Street analysts’ expectations tracked by Bloomberg:

• Adjusted EPS $1.31 vs. $2.20 y/y, estimate $1.69

• Comparable sales +5.3% vs. +11.6% y/y, estimate +3.95%

• Net revenue $88.44 billion, +3.7% y/y, estimate $89.33 billion

• Healthcare Benefits revenue $32.24 billion, +25% y/y, estimate $30.49 billion

• Health services revenue $40.29 billion, -9.7% y/y, estimate $40.64 billion

• Pharmacy network revenues $20.46 billion, -26% y/y, estimate $23.86 billion

• Mail & specialty revenue $17.26 billion, +6.9% y/y, estimate $14.6 billion 

• Total pharmacy claims processed 462.9 million, -21% y/y, estimate 467.83 million

• Pharmacy and consumer wellness revenue $28.73 billion, +2.9% y/y, estimate $28.29 billion

• Corporate & Other revenue $115 million, -39% y/y, estimate $113.3 million

• Adjusted operating income $2.96 billion, -32% y/y, estimate $3.58 billion

Adjusted earnings for the first quarter were $1.31 a share, well below the average estimate of $1.69 and $2.2 in the same period one year ago. Revenue of $88.4 billion missed estimates by nearly $1 billion but up 4% from the year-earlier period, driven mainly through its pharmacy business and insurance unit. 

Due to underwhelming first-quarter results, CVS lowered its earnings outlook for the full year to $7 per share from the previously announced $8.30. It also lowered its forecast for cash flow from operations by $1.5 billion to around $10.5 billion. 

Here’s the full-year outlook:

• Revised GAAP diluted EPS guidance to at least $5.64 from at least $7.06 

• Revised Adjusted EPS guidance to at least $7.00 from at least $8.30

• Revised cash flow from operations guidance to at least $10.5 billion from at least $12.0 billion

The earnings report noted that rising medical costs were a significant factor in first-quarter results. CVS’ Aetna division reported a 90.4% medical loss ratio, up from 84.6% a year earlier. A lower ratio indicates that the company received more premiums than it paid out in benefits, resulting in higher profitability. 

The source of the medical cost spike is a surge in Medicare Advantage patients returning to hospitals and doctor offices for procedures that were delayed during the Covid pandemic. Some of these non-essential medical surgeries include joint and hip replacements. 

The earnings report spooked investors. Shares are down 13% in premarket trading. 

If the losses hold, this will be the largest intraday drop for CVS in years…

And shares are touching Covid lows. 

“The current environment does not diminish our opportunities, enthusiasm, or the long-term earnings power of our company. We are confident we have a pathway to address our near-term Medicare Advantage challenges,” CEO Karen Lynch said in the press release. 

Lynch continued: “We remain committed to our strategy and believe that we have the right assets in place to deliver value to our customers, members, patients, and shareholders.”

Thanks to an upward revision in March (from +184k to +208k), April’s ADP print was lower at +192k (beating expectations of +183k)…

Under the hood, practically everything was solid, with only the Information sector losing jobs…

“Hiring was broad-based in April. Only the information sector – telecommunications, media, and information technology – showed weakness, posting job losses and the smallest pace of pay gains since August 2021,” said Nela Richardson Chief Economist, ADP.

Wage growth slowed for both Job-Changers and Job-Stayers (but the former remains elevated)…

Finally, as a reminder, the ADP headline data has under-estmated the BLS magical print for eight straight months ahead of Friday’s data…

So, with this kind of labor market, can The Fed maintain the illusion of any rate-cuts at some point this year? What will Powell say today?

US equities were set for a second day of losses, as investors weighed disappointing tech earnings and braced for today’s Quarterly Refunding Announcement and Fed rate decision and Powell press conference where the Fed chair is expected to signal a delay to rate cuts. S&P 500 futures slid 0.4%, while Nasdaq 100 contracts dropped 0.8% as of 7:40 a.m. in New York, extending losses from Tuesday with markets digesting the surge the employment cost index, a measure of wages and benefits, driven by soaring union and government wages as well as the drop in US consumer confidence to its lowest since level 2022. Europe’s Stoxx 600 gauge edged lower in holiday-thinned trading. The Bloomberg dollar index was little changed, while the two-year Treasury yield held near a six-month high. Gold rebounded from yesterday’s rout but bitcoin did not and instead tumbled deeper below $60,000 driven by European selling. It’s a busy calendar and besides the FOMC, we also get the April ADP employment change (8:15am), April US manufacturing PMI (9:45am), March construction spending and JOLTS job openings and April ISM manufacturing (10am).

In premarket trading, AMD shares slipped after the chipmaker issued a disappointing forecast for artificial intelligence processors as it attempts to make inroads into the lucrative market dominated by Nvidia. Super Micro Computer also dropped despite beating forecasts. Starbucks slumped after quarterly sales fell for the first time since 2020. In contrast, Amazon.com shares rose in premarket trading after the e-commerce and cloud computing company reported first-quarter results that beat expectations. Pinterest jumped after the social media company’s better-than-expected results and outlook prompted analysts to raise their price targets on the stock. Here are the biggest premarket movers:

• Advanced Micro Devices shares slip 6.8% after the chipmaker issued a disappointing forecast for artificial intelligence processors as it attempts to make inroads into the lucrative market dominated by Nvidia.
• Amazon shares are up 2.2% after the e-commerce and cloud computing company reported first-quarter results that beat expectations.
• Cryptocurrency-linked stocks fall as the prospect of higher-for-longer interest rates is weighing on the sector and Bitcoin extends losses for a third consecutive session. Coinbase Global (COIN US) -3.9%, Marathon Digital (MARA US) -4.7%, Riot Platforms (RIOT US) -4.1%, Hut 8 Mining (HUT US) -6.9%, Cleanspark (CLSK US) -4.5%, MicroStrategy (MSTR US) -4.2%, Cipher Mining (CIFR US) -5.9%, Bitdeer Technologies (BTDR US) -2%
• Inari Medical shares rise 12% in premarket trading after the medical device firm reported a firm sales beat and boosted its year sales view.
• Leggett & Platt shares drop 13% after the furniture component maker slashed its dividend after over 50 years of reliable growth.
• Lemonade shares gain 8.1% after the company, which offers renters and homeowners insurance, raised its revenue forecast for the full year.
• Nio ADRs rise 2.1% after the Chinese EV maker reported a 32% jump in vehicle deliveries in April compared with the previous month.
• Pinterest shares gain 17% after the social media company’s better-than-expected results and outlook prompted analysts to raise their price targets on the stock.
• Polestar ADRs fall 7.9% after the electric vehicle maker postponed its fourth-quarter and full-year earnings report and identified accounting errors made in previous years.
• Root shares 28% after the car insurance company reported first-quarter total revenue that beat the average analyst estimate.
• Sirius XM shares rise 1.7% after Goldman Sachs lifts its rating on the satellite radio company to neutral from sell, citing a period of underperformance by the stock.
• Skyworks Solutions shares slump 14% after the semiconductor device company issued weaker-than-expected forecasts for revenue and profit in the current quarter, spurring analysts to cut their ratings and price targets on the stock.
• Starbucks shares slide 12% as a fall in the coffee chain’s second-quarter comparable sales bucked consensus estimates for a 1.5% increase. William Blair downgraded their recommendation on the stock.
• Super Micro Computer shares fall 9.9% after estimate-topping forecasts for adjusted EPS and net sales in the fourth quarter weren’t enough to impress investors. JPMorgan flags concern over capital needs.
• TransMedics shares gain 14% after sales beat expectations thanks to greater usage of organ transportation technologies, and the company boosted its 2024 revenue guidance.

Here are the biggest large cap (>$20BN) movers this morning:

• Pinterest (PINS US) +18.1%
• Amazon (AMZN US) +2.4%
• 3M Co (MMM US) +1.4%
• GE Healthcare (GEHC US) +1.2%
• Datadog (DDOG US) +1.2%
• Tesla (TSLA US) -2.5%
• Coinbase (COIN US) -3.0%
• AMD (AMD US) -6.2%
• Super Micro Computer (SMCI US) -9.2%
• Starbucks (SBUX US) -12.2%

“The main catalyst for the selloff yesterday came from the Employment Cost Index for the first quarter, which is an important one since the Fed view it as a high-quality indicator,” said Deutsche Bank AG strategist Jim Reid. “Moreover, it adds to the collection of readings which suggest that inflation is remaining stubbornly above target, and if anything might even be re-accelerating.”

US stocks had their first negative month since October, as volatility rose amid a more hawkish tone from Fed officials, pushing back against the timing for rate cuts. Bond markets are currently expecting just one rate cut by the end of the year, compared with almost seven in January.

Traders are bracing for big market moves and bonds are turning more bearish ahead of what many expect will be a hawkish tilt from Powell. After positioning at the start of the year for multiple reductions in 2024, investors are now pricing in just one full quarter-point cut. 

With all eyes on the Fed today and Powell’s presser, a hawkish pivot is all but priced in and any dovish signalling could send stocks soaring (more in our preview here). The last time Powell spoke, he pointed to the lack of progress in bringing inflation down. The most recent signals on prices and the economy. along with expectations for a robust employment report on Friday, mean the chances of a a change in tune are low. Some are even pricing in higher odds of a rate hike than a rate cut in the immediate future, but not Goldman: this is what the bank wrote in its FOMC preview:

We continue to think that rate hikes are quite unlikely because there are no signs of genuine reheating at the moment, and the funds rate is already quite elevated. It would probably take either a serious global supply shock or very inflationary policy shocks for rate hikes to become realistic again. And even then, the FOMC might prefer to hold the funds rate steady at a high level unless the shocks seemed likely to spark a broader and more persistent inflation problem

Still, WSJ’s Timiraos wrote on X that “It’s another wait-and-see meeting for the Fed, but this time, the questions are likely to be tilted in the direction of filling out the Fed’s reaction function for upside risks on inflation and wages rather than downside risks or benign inflation.”

Others expect nothing major to be unveiled today: “We are unlikely to hear anything dovish from the Fed today,” said Lilian Chovin, head of asset allocation at Coutts. “The higher-for-longer narrative is not easy for markets to navigate.”

Still, the market isn’t taking any chances, and the options market is flagging a bigger move in the S&P 500 Index than at any point in the past 11 months. Meanwhile, data for the week leading up to April 23 showed hedge funds building short positions in bond futures. Commodity trading advisors, or CTAs, are now sitting at near “max short duration,” according to Bank of America strategists.

Ahead of the Fed meeting, traders face a slew of US economic releases including job openings and manufacturing data. They will also be on the watch for the Treasury’s quarterly plan of long-term debt sales, which are expected to remain steady, and the exact date for a Treasury program to buy back existing debt.

Elsewhere, global investors are unwinding bets on local-currency bonds in emerging markets as some central banks come under pressure to raise interest rates. A Bloomberg gauge of the asset class fell 1.3% in April, the the biggest monthly decline since September.

Most markets are closed in Europe and in Asia for the May day holiday. UK stocks held steady, with health care, banks and miners on the rise.  The FTSE 100 rises 0.1%.

In FX, the Bloomberg Dollar Spot Index is little changed amid thin volumes, with some markets closed due to a public holiday
Spot volumes run at 60%-70% of recent averages in the euro and the pound, a Europe-based trader says; DTCC data show options flows at 75% of average Options traders have added topside bets in the dollar versus its major peers; one-month risk reversals in BBDXY at 48 basis points, versus 34 basis points on April 24. USDJPY was hovering just below 158 as the market faded much of Japan’s intervention gains.

In rates, treasuries edged lower ahead of the Fed decision later on Wednesday. Treasuries were narrowly mixed with yields less than 1bp from Tuesday’s closing levels. Most US yields slightly higher on the day with 10-year around 4.68%; gilts lag by 3bp in the sector. European rates see wider losses, with gilts lagging after 10-year bond sale. Data-heavy US session includes April ADP employment change and manufacturing gauges and March JOLTS job openings before attention turns to Fed policy announcement. 

The Fed rate decision expected at 2pm New York time, Chair Powell’s news conference thirty minutes later. Bond market positioning appears to lean short ahead of the meeting, anticipating a hawkish pivot

In commodities, oil prices decline, with WTI falling 1.8% to trade near $80.50. Bitcoin drops 4% to around $57,000.

Bitcoin (-4.3%) sank briefly below $57k after hefty selling pressure; currently holds just above the aforementioned level.

Looking at the day ahead, at 8:30am Treasury quarterly refunding announcement of next week’s auction sizes and projections for the May-to-July period is expected to deliver on January guidance of no further increases to nominals. US economic data slate includes April ADP employment change (8:15am), April final S&P Global US manufacturing PMI (9:45am), March construction spending and JOLTS job openings and April ISM manufacturing (10am). Finally, today’s earnings releases include Mastercard, Pfizer, and Qualcomm.

Market Snapshot

• S&P 500 futures down 0.3% to 5,053.75
• STOXX Europe 600 little changed at 504.61
• MXAP down 0.5% to 173.42
• MXAPJ down 0.3% to 537.53
• Nikkei down 0.3% to 38,274.05
• Topix down 0.5% to 2,729.40
• Hang Seng Index little changed at 17,763.03
• Shanghai Composite down 0.3% to 3,104.82
• Sensex down 0.3% to 74,482.78
• Australia S&P/ASX 200 down 1.2% to 7,569.95
• Kospi up 0.2% to 2,692.06
• German 10Y yield little changed at 2.58%
• Euro little changed at $1.0669
• Brent Futures down 1.1% to $85.42/bbl
• Gold spot up 0.0% to $2,286.31
• US Dollar Index little changed at 106.32

Earnings

• Amazon (AMZN) Q1 EPS 0.98 (exp. 0.83), Q1 revenue USD 143.31bln (exp. 142.5bln); North America net sales USD 86.34bln (exp. 85.55bln), International net sales USD 31.94bln (exp. 32.47bln); Q1 AWS net sales ex-FX +17% (exp. +14.5%); Q1 operating margin 10.7% (exp. 7.63%); Q1 North American retail operating margin 5.8% (exp. 5%). Sees Q2 net sales between USD 144-149bln (exp. 150.13bln), sees Q2 operating income of USD 12bln (exp. 12.7bln). Shares +2.4% pre-market
• Starbucks (SBUX) Q2 adj. EPS 0.68 (exp. 0.79), Q2 revenue USD 8.56bln (exp. 9.13bln); Q2 comp. sales -4% (exp. +1.46%), North America comps -3% (exp. +2.05%), US comps -3% (exp. +2.31%), International comps -6% (exp. +1.36%), China comps -11% (exp. -1.62%) Shares -12.1% pre-market
• Super Micro (SMCI) Q3 adj. EPS of 6.65 (exp. 5.78), Q3 revenue of USD 3.85bln (exp. 3.95bln); Q3 gross margin 15.6% (exp. 15.34%) Shares -9% pre-market
• Advanced Micro Devices (AMD) Q1 adj. EPS 0.62 (exp. 0.61), Q1 revenue USD 5.47bln (exp. 5.46bln). Sees Q2 revenue between USD 5.4-6bln (exp. 5.72bln), sees Q2 adj. gross margin of about 53% (exp. 53%), and sees AI chips sales of about USD 4bln (prev. saw USD 3.5bln). Shares -6.3% pre-market
• GSK (GSK LN) Q1 (GBP): Revenue 7.363bln (exp. 7.067bln). EPS 0.431 (exp. 0.360). Adj. Operating Profit 2.443bln (exp 2.096bln). Sees FY adj. EPS +8-10% (prev. +6-9%) and sees Adj. FY operating profit +9-11% (prev. +7-10%). Shares +1.6% in European trade

Top Overnight News

• Beijing is preparing for a second Trump term and bracing for the turmoil that would bring in US-China relations (China thinks a second Trump term would be a net negative for it). WSJ
• Starbucks missed a very low bar, with a significant miss on EPS (68c vs. the Street 80c) and sales (comps -4% vs. the Street +1.5%). Comps were weighed down by soft transactions (-6%, a huge swing from +3% in the prior quarter) and a China pressure (comps in China slumped 11%). Op. margins contracted 150bp to 12.8%, a large miss vs. the consensus. RTRS
• Aston Martin shares lower after the company reported a shortfall on Q1 revenue (-10% to GBP267.7MM vs. the Street GBP290MM) and EBITDA (-34% to GBP19.9MM vs. the Street GBP29.4MM). RTRS
• AMD reported Q1 inline and the Q2 guide was largely consistent w/expectations, but the new AI accelerator chip sales guidance of ~$4B for ’24 didn’t get increased by as much as hoped. RTRS
• US crude stockpiles increased 4.9 million barrels last week, the API is said to have reported. That would be the fifth expansion in six weeks if confirmed by the EIA today. Supplies at Cushing jumped, while those of gasoline and distillate dipped. BBG
• Amazon gained premarket after its AWS unit posted strong sales growth, making up for the company’s lower-than-expected current-quarter sales forecast. Its livestreaming site Twitch launched a short-form video platform that may rival TikTok. BBG
• We continue to think that rate hikes are quite unlikely because there are no signs of genuine reheating at the moment, and the funds rate is already quite elevated. It would probably take either a serious global supply shock or very inflationary policy shocks for rate hikes to become realistic again. And even then, the FOMC might prefer to hold the funds rate steady at a high level unless the shocks seemed likely to spark a broader and more persistent inflation problem. GIR
• New York City police stormed Columbia University’s campus on Tuesday night, arresting dozens of pro-Palestinian protesters in an attempt to quash unrest that has spread to campuses across the nation and inflamed US divisions over the war in Gaza. FT
• Pfizer is developing an online platform for patients to order medicine including anti-Covid drug Paxlovid and a migraine nasal spray, according to people familiar with the matter, in the latest push by drugmakers to cut out industry middlemen and sell straight to consumers. FT

A more detailed look at global markets courtesy of Newsquawk

APAC stocks took their cues from the losses on Wall St amid a hawkish impulse owing to the firmer-than-expected Employment Cost data heading into today’s FOMC and with trade mired by mass holiday closures. ASX 200 was pressured as gold miners led the declines after the precious metal slid beneath the USD 2,300/oz level, with underperformance also seen in rate-sensitive sectors. Nikkei 225 slipped at the open but held on to 38,000 status and briefly clawed back all of its losses with the downside cushioned by a weaker currency and as participants digested another batch of earnings releases, while it was also reported that Japan could provide tax breaks for companies repatriating foreign profits into the JPY.

Top Asian News

• NDRC said China will promote the development and growth of leading companies in the NEV industry, as well as accelerate the exit of lagging enterprises and capacities. Furthermore, China will lift foreign investment access restrictions in the manufacturing industry and it welcomes global automotive companies to deeply integrate into China’s market and industrial chain system.
• Japan may introduce measures to provide tax breaks for companies repatriating foreign profits into the JPY and include it in the government’s annual mid-year policy blueprint, according to Sankei.
• RBNZ Financial Stability Report stated New Zealand’s financial system remains strong and rising nominal incomes are helping many households navigate the transition onto higher interest rates, while it added some are doing it tough and reducing their spending or extending their repayment timelines. RBNZ also stated that although non-performing loans to businesses have increased, they remain low by historical standards and there remains a risk that new or persistent inflation pressures could mean global interest rates remain restrictive for longer.
• RBNZ Deputy Governor Hawkesby said New Zealand’s employment data is confirmation of the trend they were expecting to see and higher interest rates will involve a cooling of the labour market.
• Japan’s Government is considering laws and regulations for AI development and obligatory reporting to large-scale business, via Nikkei

European bourses are closed for Labour Day, with the exception of the UK’s FTSE 100 and Denmark’s Nasdaq Copenhagen. The FTSE 100 (+0.1%) is incrementally firmer, though has come under slight selling pressure in recent trade. GSK (+1.9%) gains post-earnings after beating on top/bottom lines, and raising guidance. US Equity Futures (ES -0.3%, NQ -0.6%, RTY -0.3%) are entirely in the red, with clear underperformance in the NQ, hampered by chip-led weakness. Amazon (+2.3%) firmer pre-market on its results, whilst dire Starbucks (-12.1%) earnings have led to pre-market pressure.

Top European News

• UK House Prices Fall Again After Mortgage Rates Creep Higher
• Bitcoin Hits Two-Month Low After Worst Stretch Since FTX Crash
• It’s the Weather, Stupid!: The London Rush
• GSK Expects Higher Profits Boosted By Vaccines, Asthma Drugs
• Ireland’s Listed Companies Now Have Zero Female CEOs
• Aston Martin Slumps; First Quarter a ‘Big Miss,’ Jefferies Says
• UAE Snubs London’s Lord Mayor as Row Over Sudan Role Deepens

FX

• USD is steady vs. peers after yesterday’s buying momentum followed through into the early stages of today’s trading with the index topping out just shy of the YTD peak at 106.51. A slew of US data and the FOMC thereafter will decide direction.
• EUR is flat vs. the USD with European markets closed for Labour Day. EUR/USD did drift as low as 1.0650 before staging a marginal pick up.
• JPY is trivially softer vs. the USD (compared to recent moves) with the pair briefly eclipsing the 158 mark. Focus is on today’s busy US data/FOMC docket and whether a hawkish outturn could see a revisit to 160.
• Antipodeans are both relatively steady vs. the USD after yesterday’s pronounced selling. AUD/USD marginally extended on yesterday’s low with the session trough at 0.6466 before picking up a touch.

Fixed Income

• USTs are flat ahead of a packed US session, holding at 107-14 which is 10 ticks above the contract low from last week. Alongside this, Quarterly refunding is due after Monday’s estimates were above exp., though coupon sizes seen unch. Q/Q with the extra need to be filled by bills.
• Gilts are softer as the benchmark catches up to the continued late-doors downside in benchmarks on Tuesday. Catalysts light thus far given the mass-European market closure for Labour Day. Gilt auction was incrementally softer than the prior but still solid overall with a few fleeting downticks to a 95.44 base.

Commodities

• A downbeat session for the crude complex thus far amid the broader risk aversion in APAC hours coupled with the surprise large build in crude stockpiles and the “positive” atmosphere in efforts to reach an Israel-Hamas ceasefire. Brent July slipped from a USD 85.88/bbl high to a trough at USD 85.22/bbl.
• A flat session for spot gold but mixed for the overall complex with spot silver posting mild gains and spot palladium in the red. Price action in the yellow metal has been minimal thus far amid the aforementioned mass closures and upcoming risk events state-side; Spot gold is currently confined to a USD 2,281-2,293.oz.
• Base metals are lower across the board amid the negative APAC sone coupled with low demand amid mass market closures. On that note, Chinese markets will remain closed for the rest of the week.
• US Energy Inventory Data (bbls): Crude +4.9mln (exp. -1.1mln), Gasoline -1.5mln (exp. -1.1mln), Distillate -2.2mln (exp. -0.2mln), Cushing +1.5mln.
• US and Philippines reportedly eye a partnership to cut China’s nickel dominance, according to Bloomberg.

Geopolitics

• Walla’s Elster citing a senior Egyptian source who told local media that efforts to reach a truce agreement continue in a “positive atmosphere”
• Hamas official says the group still studying recent ceasefire offer
• Philippines Coast Guard official said China’s Coast Guard has elevated the tension and level of aggression, while the official added the Chinese Coast Guard’s use of a water cannon is still not an armed attack but is using higher water pressure, according to Reuters.

US Event Calendar

• 07:00: April MBA Mortgage Applications -2.3%, prior -2.7%
• 08:15: April ADP Employment Change, est. 180,000, prior 184,000
• 09:45: April S&P Global US Manufacturing PM, est. 49.9, prior 49.9
• 10:00: March JOLTs Job Openings, est. 8.69m, prior 8.76m
• 10:00: March Construction Spending MoM, est. 0.3%, prior -0.3%
• 10:00: April ISM Manufacturing, est. 50.0, prior 50.3
• 14:00: May FOMC Rate Decision

DB’s Jim Reid concludes the overnight wrap

Since it’s the start of the month, Henry will shortly be releasing our usual performance review for the month just gone. Overall, April marked a change in tone from the positivity of Q1, as investors’ concern grew about sticky US inflation and geopolitical tensions in the Middle East. Although that helped haven assets like gold and the US Dollar, it also meant the S&P 500 fell back (-4.16%) after 5 consecutive monthly gains, whilst 10yr Treasury yields (up +48bps) saw their biggest increase since September 2022. See the full report in your inboxes shortly. May will start with a holiday today across much of Europe and some of Asia but it won’t be quiet later on with the latest FOMC set to be fascinating in terms of what Powell says about inflation and rates. A full preview follows below.

Those April themes we discussed above were very evident on the last day of the month yesterday, as US data pointed to stubborn inflation and weak consumer confidence, which meant bonds and equities both lost substantial ground. That’s certainly a big part of our “what keeps us awake at night” pack. The main catalyst for the selloff yesterday came from the Employment Cost Index for Q1, which is an important one since the Fed view it as a high-quality indicator. That rose by +1.2% in Q1 (vs. +1.0% expected), which is the strongest reading in a year. Moreover, it adds to the collection of readings which suggest that inflation is remaining stubbornly above target, and if anything might even be re-accelerating. 90 minutes later, any remaining positive sentiment took a further hit after the Conference Board’s consumer confidence indicator fell back to 97.0 in April (vs. 104.0 expected). Maybe falling equities, rising yields, and higher oil earlier in the month played a part. That was its lowest reading since July 2022, back when there were heightened fears of a recession after the Fed had begun hiking by 75bps and global energy prices were surging. Elsewhere the Chicago PMI saw a very surprising slump to 37.9 vs. 45.0 expected, only one tenth off being the worst print since the early months of the pandemic and lower than anything seen between the GFC and the pandemic. This was once a bellwether but has lost a lot of its lead indicator sheen in recent months.

Given we’ve got the Fed’s latest decision tonight and Chair Powell’s press conference, we should soon find out how they’re thinking about all this data. But in the meantime, the ECI data led investors to price out the chance of cuts this year, and they now see just 28bps of cuts by the December meeting, which is the fewest so far. If that profile is realised, it would also mean that the Fed funds rate stays above 5% for the entirety of 2024, so depending how you define “higher for longer”, this is clearly moving in that direction. In turn, that led to a fresh selloff for US Treasuries, and the 2yr yield (+5.8bps) closed at 5.04%, marking the first time since November that it’s closed above 5%. The 10yr yield was also up +6.6bps to 4.68%, although it remains beneath its peak levels from last week. They are a basis point lower in Asia this morning.

In terms of the Fed’s decision, it’s widely expected that they’ll leave rates unchanged today. But given the recent inflation data, our US economists think there’ll be a more hawkish-leaning message, echoing Chair Powell’s view that it will take longer to gain confidence about disinflation. One thing to look out for will be if we hear anything about a potential slowing of QT, although our economists believe this is likely to wait until June, as the FOMC will want to avoid a dovish misinterpretation that could ease financial conditions inadvertently. In the press conference, they think Chair Powell will emphasise that there’s no urgency to reduce rates given the resilient economy. See their full preview here for more details. One possible saving grace for bond investors going into the Fed is that yields have tended to decline around Fed meetings, an empirical observation that our US team took a deep dive into in a report here on Monday. We also have the latest QRA today with our preview here. Our US rates strategists see the main focus as likely to be on details of the Treasury’s new buyback program.

With investors pricing in higher rates for longer, equities had a challenging month end on both sides of the Atlantic. The S&P 500 fell -1.57% yesterday, its worst decline since January, with an already bad day made worse by a -0.5% slump in the final 10 minutes of month-end trading. That means that the index was down by -4.16% over April as a whole, ending a run of 5 consecutive monthly gains. And as it happens, it was actually the index’s second-worst monthly performance since December 2022, around the time the S&P had seen a peak-to-trough decline of -25%. Only September 2023 has been worst since. In terms of yesterday’s moves, the Magnificent 7 (-2.55%) helped to drive the declines, with Tesla (-5.55%) falling back after its surge on Monday. But equities also struggled more broadly, with the small-cap Russell 2000 (-2.09%), the NASDAQ (-2.04%) and the Dow Jones (-1.49%) all posting large declines. Meanwhile in Europe, the STOXX 600 (-0.68%) fell back more modestly, though Spain’s IBEX 35 (-2.22%) had its worst daily performance in over a year.

After the US close, we had results from Amazon. These beat Q1 revenue and earnings estimates thanks to stronger cloud computing growth, but the positive read through was limited by softer-than-expected sales guidance for Q2. Amazon shares were up slightly over +1% in after-hours trading after falling -3.29% yesterday. The negative sentiment from the US equity close has continued overnight, with S&P (-0.09%) and NASDAQ (-0.27%) futures trading slightly lower as I type.

Earlier in the day, the European data had actually come in pretty strongly, as Euro Area GDP growth came in at +0.3% in Q1 (vs. +0.1% expected). Moreover, the flash CPI release was in line with expectations at +2.4%, even if core CPI was a touch higher than expected at +2.7% (vs. +2.6% expected). Nevertheless, that was still the lowest core CPI in over two years, and the GDP growth was the strongest since Q3 2022. So it adds to the signals that Euro Area growth is turning higher, and it didn’t provide anything to really shift expectations for an ECB rate cut in June either, with market pricing still pointing to an 87% chance of a move. That said, the combination of solid European data and the reaction to the US ECI release saw the amount of ECB rate cuts priced by December fall -6.5bps to 66bps yesterday, its lowest so far this cycle. With this backdrop, yields on 10yr bunds (+5.1bps), OATs (+4.9bps) and BTPs (+6.1bps) all moved higher.

Asian equity markets are lower this morning in holiday thinned trading. The Nikkei (-0.56%) is seeing further losses after its worst month since December 2022 while the S&P/ASX 200 (-0.97%) is trading notably lower. Otherwise most Asian markets are closed due to the Labor day holiday.

In terms of yesterday’s other data, German unemployment was up by +10k in April (vs. +8k expected), and German GDP was up by +0.2% in Q1 (vs. +0.1% expected). Here in the UK, mortgage approvals were up to an 18-month high in March of 61.3k (vs. 61.5k expected). And in the US, the FHFA house price index for February was up +1.2% (vs. +0.2% expected).

To the day ahead now, and the Federal Reserve decision and Chair Powell’s subsequent press conference will be the main highlight. Otherwise, US data releases include the ISM manufacturing for April, the ADP’s report of private payrolls for April, and the JOLTS report for March. From central banks, we’ll also hear from the ECB’s De Cos. Finally, today’s earnings releases include Mastercard, Pfizer, and Qualcomm.

Authored by Simon White, Bloomberg macro strategist,

How the Treasury intends to meet its borrowing requirements – the mix between shorter-term bills and longer-term coupons – will strongly influence liquidity and thus the performance of risk assets.

Quantitative tightening is thus on borrowed time, and the Federal Reserve’s next move this year is still likely to be an interest rate cut, despite the re-emergence of inflation.

On Wednesday the Treasury will announce how it intends to borrow $243 billion in Q2 and $847 billion in Q3, the amounts it announced on Monday that it wanted to raise. Q2’s figure was above the previous estimate, while Q3’s number was toward the upper end of expectations. The consensus is leaning toward the increase being made up for by issuing bills rather than coupons.

The distinction is important.

Treasury has increased its issuance of bills over the last 18 months. This enabled money market funds (MMFs) to lend to the government using liquidity parked at the Fed’s reverse repo facility (RRP).

Bills are now over the 20% ratio to total debt outstanding, which the Treasury has generally preferred to keep it under.

Even if the Treasury does not announce it will reduce bill issuance and increase coupon issuance this week, it’s likely it will at some point. Having too high a proportion of short-term, more money-like liabilities interferes with the Fed’s monetary independence (and arguably already is).

But increasing coupons is likely to have a detrimental impact on liquidity. MMFs can’t buy coupons. Instead it’s banks, other financials, households and foreigners. The issue is when any of these entities buy bonds, they have to use reserves.

Only banks can in effect create bank deposits to buy Treasuries, mitigating the effect on reserves, and they have on net been divesting themselves of them since the Fed started hiking.

And looking at leading indicators, they are likely to continue to do so as they expand their commercial lending.

Yet, even before we get to the point of more coupon issuance, the advantage from heavy bill issuance is thinning out.

The domestic RRP is down to $500 billion, and it may not even need to get to zero for MMFs to stop tapping it to buy bills (they may wish to keep some ready cash-on-hand for customer withdrawals). At that point, MMFs’ bill buying will start to eat reserves and thus impact liquidity.

Either way, therefore, Treasury’s borrowing is soon likely to make its presence more felt in markets as pressure on reserves grows, increasing the likelihood the Fed loosens policy this year.