Month: May 2024

Shares of Moderna are up more than 4% in the New York premarket trading session following a report by the Financial Times that the US government is preparing to “bankroll a late-stage trial of Moderna’s mRNA pandemic bird flu vaccine.” H5N1 is spreading across the US ahead of the November presidential elections, and some prominent doctors have already warned about university labs experimenting with H5N1 gain-of-function. 

Shares have been ramping higher on bird flu headlines over the past several months.

Sources familiar with the talks between Moderna and the government’s Biomedical Advanced Research and Development Authority, known as Barda, say federal funding could be allocated to the pharma company as early as next month. 

“It is expected to total several tens of millions of dollars, and could be accompanied by a commitment to procure doses if the phase-three trials are successful,” they said.

Moderna has previously said it was trialing H5N1 flu vaccines, with interim data expected soon. 

Moderna is currently testing an H5N1 vaccine, from the 2.3.4.4b subset of viruses, in people. That trial began last summer.

But the trial’s listing in the Clinicaltrials.gov database is cagey about the dosages Moderna is testing, calling them simply dose number 1, 2 and 3. -Statnews

As of Wednesday, the US Department of Agriculture has detected 67 dairy cow herds with H5N1 infections in nine states: Texas, Kansas, New Mexico, Michigan, Idaho, North Carolina, South Dakota, Ohio, and Colorado. 

The ongoing outbreak is linked to dairy cattle. Only two H5N1 cases have been detected among humans. The first was in April, with a Texas dairy worker, and the second was from a Michigan dairy farm last week. Both had mild infections and have since recovered.

FT also said the federal government is in talks with Pfizer about an mRNA vaccine targeting H5N1. 

In recent notes, we penned “The Escalating Threat Of Avian Influenza H5N1 And The Ethical Quandary Of Gain-of-Function Research” and “Former CDC Director Sounds Alarm Over Bird Flu Experiments.”

We suspect the government will get more serious about the outbreak if human-to-human cases surge. 

And of course, their playbook for any future or potential ‘pandemic’ is to call  Moderna and Pfizer, just like what was done with Covid.

But this time around, with soaring mistrust between the people and government, we doubt the government will see the same mass vaccine compliance unless people are literally dropping dead in the street. And even then…

Authored by Charles Hugh Smith via OfTwoMinds blog,

If we add up all these tidal forces, the conclusion is self-evident: labor “inflation” has just shifted into second gear.

One of the lesser known manifestations of the inflationary crisis in early-1920s Germany was rampant wage inflation. Bourgeois burghers complained bitterly about the high wages being demanded–and received–by tradespeople. This reversal of fortune–wage earners gaining some power over the upper-middle class and wealthy–was naturally upsetting to those accustomed to wielding power over mere laborers.

But when the roof is leaking or the car won’t start, negotiations favor the few who can actually fix the problem. Despite the overblown hoopla about AI, ChatGPT can’t fix leaky pipes or roofs, nor will it ever be able to do so because all it can actually do is play around with words. Since we can’t repair a leaky roof or prune a tree with words, Large Language Model (LLM) – Machine Learning AI is useless in the real world.

Which brings us to the remarkable competition among the uber-wealthy for competent housekeepers: Palm Beach housekeepers are making $150,000 a year due to massive demand from the wealthy.

It’s certainly tempting to collect a cool $120,000 to $150,000 a year for dusting the Dali and other fine art, but as with many other forms of labor, the skillset required isn’t quite as easy as it looks from the outside:

The mass wealth migration to Florida from New York and other high-tax states has created record demand for household staff in elite Florida enclaves–especially Palm Beach. Demand for butlers (now called ‘hospitality managers’ or ‘estate managers’) as well as nannies, chefs, drivers and personal security has surged, according to staffing agencies.

It’s the shortage of housekeepers, however, that has created the biggest mess for wealthy homeowners. Many of the wealthy emigres to Florida bought big homes and now need people to clean them. Hotels, resorts and businesses are also vying for cleaning staff. The result: Typical pay for housekeepers has rocketed from about $25 an hour in 2020 to $45 or $50 an hour today, according to some agencies.

Bidding wars between wealthy homeowners have become common. Staffing agencies are posting ‘Help Wanted’ ads all over the web and throughout West Palm Beach. Clients are growing frustrated.

“At first they’re in shock, and they say, ‘No way I’m paying that,'” Berube said. “It’s even uncomfortable for me to give them the numbers. But when they try to hire someone for less, with less experience, they almost always come back to us and say, ‘I learned my lesson. We are willing to pay for the experience.'”

Berube said the housekeepers for the wealthy need highly specific skills–from how to move quietly and unnoticed throughout the house, to how to carefully clean antiques, flatware and fine art and how to properly wash and press fine linens.

“There are specific tools and skills you need to work in fine homes,” she said.

In other words, Jeeves won’t come cheap, and the outraged wealthy must swallow their targeted frugality–lavish spending on themselves, low pay for the help–if they want things done properly in the real world.

The backdrop for sustained wage inflation is already firmly in place. As the chart below illustrates, wages’ share of the economy have been declining for 49 years, and has plenty of room to move sharply higher, in effect reversing the tide of trillions of dollars siphoned off by capital in the 50-year long experiment of elevating globalization and financialization to dominance.

Demographically, millions of people have left the workforce for good. This trend is especially visible in males who didn’t earn a college degree. We can debate the specifics of this massive demographic shift, but not its impact: the labor force of those willing and able to do in-demand tasks is shrinking.

Generationally, millions of Boomers are working past traditional retirement age for a variety of reasons, but this boost to labor force numbers has an expiration date: at some point full-time physical labor is no longer viable. Yes, there are plumbers over the age of 80 still working, but they’re working part-time and they’re not working for chump-change.

Work is more demanding nowadays. Those with little real-world knowledge may dismiss fast-food workers, for example, as low-skilled “burger flippers,” but this is not the lived reality of the work: fast-food is a high-production, demanding industry. Not everyone can keep up the pace or do the work. This describes many of the jobs wrongly dismissed as “low-skill.”

Now overlay the soaring number of disabled. Again, we can quibble about the causes until doomsday, but the reality isn’t changed by our debate.

Then there’s the cultural shift of denigrating physical, skilled labor in favor of trading meme stocks and becoming a social media influencer. The worship of celebrity and the lotus-eater class has deformed the culture so that pride in the quality of one’s work has been replaced with a frantic scramble for digital visibility. The real world demands skills and quality work, and those who are able to perform are scarcer than most imagine.

It isn’t easy or quick to acquire real-world skills. Armchair pundits airily propose expanding training programs and the like, but training is only Step One of a much longer process of experiential learning. We may well have mis-trained millions of people to work in fields that will shrink as economic realities intrude–for example, fine dining and marketing. The labor scarcities that will only become more acute won’t be solved with quickie half-measures.

If we add up all these tidal forces, the conclusion is self-evident: labor “inflation” has just shifted into second gear. The real acceleration is still ahead. From the perspective of history and the real world, it isn’t “inflation,” it’s simply a return to properly valuing what’s actually valuable.

*  *  *

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What was until recently a “red-hot” economy, with the US reportedly growing at an annual rate of 4.9% in Q3 and 3.4% in Q4 2024, has suddenly and dramatically downshifted, and according to the latest GDP data released from Biden’s BEA, Q1 GDP was revised downward from 1.6% to just 1.3% (1.250% to be specific), which was the lowest GDP since the mini-recession of Q2 when GDP declined for 2 quarters in a row.

The sharp downward revision primarily reflected a downward revision to consumer spending, which rose 2.0% annualized, down from 2.5% in the first GDP report and below the 2.2%  estimate.

Drilling down into the number, the 1.3% increase reflected increases in consumer spending (below previous forecasts) and housing investment that were partly offset by a decrease in inventory investment. Imports, which are a subtraction in the calculation of GDP, increased.

• The increase in consumer spending reflected an increase in services that was partly offset by a decrease in goods. Within services, the leading contributors to the increase were health care as well as financial services and insurance. Within goods, the leading contributors to the decrease were motor vehicles and parts as well as gasoline and other energy goods.
• The increase in housing investment was led by brokers’ commissions and other ownership transfer costs as well as new single-family housing construction.
• The decrease in inventory investment was led by decreases in wholesale trade and manufacturing

In terms of bottom-line contributions, we find the following:

• Personal consumption accounted for 1.34% (down from 1.68%), or more than the entire GDP print.
• Fixed Investment added 1.02%, up from 0.91% in the first estimate.
• The change in private inventories subtracted -0.45%, a deterioration from the -0.35% estimated previously.
• Net trade (exports less imports), subtracted -0.89% from the bottom line print, comparable to the -0.86% detraction in the first estimate.
• Finally, government added just 0.23%, up from 0.21% initially estimated, yet still the lowest contribution since Q2 2022.

Turning to the PCE and price component, while all eyes will be on tomorrow’s PCE report, the GDP report – which is clearly quite as it covers Q1 – found that purchases prices, the prices of goods and services purchased by U.S. residents, increased
3.0 percent in the first quarter after increasing 1.9 percent in the fourth quarter. This was down from 3.1% reported in the first GDP report and is also below the 3.1% estimate.  Excluding food and energy, prices increased 3.2 percent after increasing 2.1 percent.

Personal consumption expenditures (PCE) prices increased 3.3% in the first quarter after increasing 1.8% in the fourth quarter. Excluding food and energy, the PCE “core” price index increased 3.6% after increasing 2.0%. This number was also below the 3.7% estimate.

Overall, the GDP number confirms that the US economy is slowing rapidly as US consumers – especially those in the lower half – have hit a brick wall with maxed out credit cards and wages which fail to keep up with inflation.

But this bad news is of course good news for the market, and predictable futures jumped to session highs, although exuberance will be contained until tomorrow’s PCE report, which we expect will also miss expectations, allowing futures to resume their Nvidia-driven meltup.

Authored by Simon White, Bloomberg macro strategist,

US regional banks’ deposits recently made new highs, exceeding the level prior to SVB’s collapse. But that’s far from an all clear. Exposure to commercial real estate continues to rise and delinquencies on the underlying loans is mounting. Hold-to-maturity bank portfolios are losing more money as yields increase, while small banks’ shares are weakening, significantly underperforming those of larger banks. Those conditions also preceded SVB’s bankruptcy last March.

The Federal Reserve has become adept at putting out fires in recent years. However, like the now-banned magic candles that re-lit after being blown out, fires can reignite. A full-scale banking crisis is unlikely, especially among the large banks, but there remain sufficient fragilities in the regional banking sector that could still deliver a nasty shock with reverberations across markets.

The Fed can rejoice in its success in preventing a wider banking crisis after Silicon Valley Bank’s failure. Deposits in small banks have now fully recovered. The Bank Term Funding Program, and a blanket deposit-guarantee for SVB and Signature Bank – which went down soon after Silicon – healed confidence in the sector.

But although the Fed feels assured enough to retire the BTFP, there is still something rotten in the state of Denmark: regional banks’ exposure to commercial real estate – the sector’s Achilles’ heel.

Small banks have always had a much larger exposure to CRE than large banks, but in the years before the pandemic their exposures tracked each other closely.

However, over the last two years small banks have doubled down on their CRE exposure to almost a third of assets – with barely a pause after SVB – while large banks have reduced theirs down to 6.5%.

Large banks’ actions are sounding the more savvy. CRE has faced huge challenges in the wake of the pandemic and a more home-centered economy. Delinquency rates in commercial mortgage-backed securities (CMBS) are rising again after their post-lockdown recovery, especially in the office and lodging sectors.

Not all CRE is bad, and not all banks will find themselves in trouble from souring commercial loans. But it is highly conceivable some will. Those with most exposure to office space, given rising delinquency rates, and to multifamily residential due to collapsing apartment prices, are a good place to start.

Furthermore, banks that make lots of loans quickly often run into issues down the line as underwriting standards can slip in haste (or are willfully overlooked to gain market share). Thus another first approach is to look at the banks who have seen their exposure to CRE rise the most since SVB’s bankruptcy.

Perhaps not uncoincidentally, some of the most shorted regional banks are those that have seen the fastest growth in commercial real estate loans, including Arkansa-based Bank OZK and BOK Financial Corporation.

The straw that broke the duration-camel’s back last year was a rise in interest rates, decimating underhedged or unhedged bond portfolios. SVB’s collapse came after a fairly rapid 50 bps rise in yields to over 4%.

The market was able to estimate losses on SVB’s AFS (available for sale) and HTM (hold to maturity) portfolios. Once this began to significantly exceed shareholder’s equity, the writing was on the wall. The shares kept sliding, and the fastest and largest bank run ever seen took place, sealing SBV’s fate.

Source: IMF

Banks’ ownership of HTM assets, which don’t have to be marked to market and whose losses are amortized, have barely fallen in the aggregate since last year. SVB had the highest proportion of HTM assets to securities held, nudging 80%.

Yields have been rising again, with the total return for Treasuries down more than 2% year-to-date and falling. Unrealized losses on HTM portfolios are still large, at $475 billion at the end of 2023, according to the FDIC (ZH: Actually they rose to $517 billion as reported yesterday in Q1).

Source: FDIC

Overall, regional banks’ total exposure to CRE plus HTM assets is higher than it was in March 2023. And losses on CRE and duration are making themselves felt, with the average operating income in the regional-bank sector (on a four-quarterly rolling basis) slipping to as low as it was before the pandemic, and a third lower than just before SVB.

Uninsured deposits were another system fragility that doomed SVB, Signature and First Republic (with NYCB recently hitting some major turbulence after acquiring Signature last year). Close to 90% of SVB and Signature’s deposits were not covered by FDIC insurance. This remains a major vulnerability for the small-bank sector, with the percentage of insured deposits for savings banks and associations (many of which come under the regional-bank category) basically unchanged since last March.

If another bank goes to the wall, the market will look to the Fed to restore stability. The BTFP was a major part of the initiative after SVB, allowing banks to swap USTs, agency debt and other high-quality collateral at par for loans of up to one year. The Fed stopped issuing new BTFP loans in March as it was being used mainly as an arbitrage.

Either way, the reintroduction of such a facility in the wake of another bank failure or failures rests on the banks having a sufficient ownership of “shiftable” securities the Fed is willing to accept. But smaller banks’ proportion of USTs and agency debt to total assets has continued fall, in contrast to large banks.

Einstein’s definition of insanity was doing the same thing over and over again and expecting a different outcome. Smaller banks in the US continue to lose money on commercial real estate, face heavy losses on securities portfolios as yields push higher, and are just as exposed in the aggregate to bank runs from uninsured deposits. Sanity thus demands being ready for more bank failures.

Another week, another government-sponsored jobless claims print to mock.

According to the Department of Labor, 219,000 Americans filed for jobless benefits for the first time last week (up from 216,000 the prior week)…

Source: Bloomberg

Tennessee and Michigan saw the largest jump in claims while Pennsylvania and California saw the biggest declines…

Continuing claims was basically flat just below 1.8 million Americans…again… but we do note that the ‘trend’ for claims is up (4-week MA at 8 month highs)…

Source: Bloomberg

While WARNs and job cut announcements (not provided by the government) are notably elevated…

Source: Bloomberg

Is everyone who is getting laid off immediately being hired by NVDA?

Will this all be ‘revised’ higher after the election?

Authored by Grant Smith via Bloomberg,

Bearish oil speculators have been out in force this month, building up their biggest short position in Brent since the depths of the pandemic in late 2020. But with a busy agenda of OPEC+ news scheduled for this weekend, history suggests that they should probably tread carefully, as the alliance could jolt prices higher.

The OPEC+ ministerial meeting is due June 2, when Saudi Arabia and its partners are widely expected to prolong roughly 2 million barrels-a-day of output curbs into the second half. While this news is largely priced in already, confirmation of the decision can always give futures some extra lift.

The other likely fixture is that the kingdom looks set to formally launch a secondary offering of shares in state champion Aramco, in a deal that could raise more than $10 billion. While there may be no direct link with the OPEC+ decision, it’s hard to imagine the world’s top crude exporter taking steps to undermine prices while the share sale is taking place.

Then there’s the possibility, flagged by veteran analyst Paul Horsnell at Standard Chartered, that OPEC+ could augment its extension with an additional “twist” — some subtle tweaks to the length or volume of the supply curbs in order to scare off those short-sellers.

Speculative bearish bets have reached the kind of levels that Riyadh has chosen to repel in the past. Just last year, when Brent shorts were heading towards 100,000 contracts — lower than current levels — Riyadh led a new wave of supply curbs specifically aimed at punishing bearish speculators.

If the OPEC+ extension is agreed as expected, crude traders will quickly turn their attention to what it means for global oil market balances in the second half. International Energy Agency data indicates the curbs would engineer a moderate supply deficit and deplete inventories, which JPMorgan believes would set Brent on track towards the $90-a-barrel mark. Given that Brent is languishing around $83 today, taking on additional short positions heading into the weekend looks like a rather brave bet.

US equity futures are weaker despite lower bond yields, breaking away from this week’s narrative of Equity/Yields negative correlation, after Salesforce plunged 15% due to disappointing guidance. Small-caps are poised to outperform but have failed to hold gains this week. As of 7:45am, S&P futures are down 0.4%, pointing to a second day of declines but off the session’s worst levels as Nasdaq futures drop 0.3% while Europe’s Stoxx 600 benchmark was led higher by telecom and banking stocks. Premarket, the Mag7 names are mostly lower, ex-AAPL, while NVDA is -0.8%, weighing on Semis, dragged lower by the read through from Salesforce. 10Y yields are down 2 basis points after jumping about 15 bps in the past two days. The US dollar is seeing its weakest start to the day for this week; commodities and bitcoin are weaker, too. Today’s macro data focus will be on Jobless Claims, Retail Inventories, Pending Home Sales, and revisions to the 24Q1 GDP print including the GDP Price Index and Core PCE Price Index. Tomorrow we receive the monthly PCE data which should be more market moving.

In premarket trading, Salesforce shares crashed 16% after the software maker said sales growth in the current quarter will stall to its slowest in history. The miss sparked concerns about the sector more broadly, and hit other software names: Oracle (ORCL) -2%, ServiceNow (NOW) -3%, MongoDB (MDB) -1%. Here are some of the biggest US movers before the opening bell:

• Agilent tumbles 13% after the life-sciences company cut its profit and sales forecast for the full year.
• American Eagle drops 7% after the apparel retailer’s first-quarter net revenue narrowly missed consensus estimates. Morgan Stanley flagged the underperformance of the firm’s Aerie brand as a major negative.
• Birkenstock jumps 8% after the sandal maker’s revenue forecast for the year came ahead of analyst expectations.
• C3.ai climbs 10% after the software company forecast 2025 revenue well above the average analyst estimate, supported by demand for artificial intelligence features.
• Foot Locker gains 13% after posting earnings that surpassed expectations as the sneaker retailer tries to get back on pace with its turnaround plan.
• HP Inc. rises 5% after the company reported net revenue for the second quarter that beat estimates.
• Moderna advances 2% after the Financial Times reported that the US government is nearing an agreement to bankroll a late-stage trial of the biotech firm’s mRNA pandemic bird flu vaccine.
• Nutanix drops 12% after the infrastructure software company gave a fourth-quarter revenue forecast that trailed analyst estimates.
• Okta climbs 4% after the security software company raised its full-year forecast.
• Pure Storage gains 9% after the cloud storage provider’s results beat estimates and its second-quarter revenue forecast topped expectations, spurring a round of price target hikes.

Global equities are headed for their worst week since mid-April as US rate-cut expectations dwindle and tepid US auctions stir worries about funding the US deficit. The S&P 500 has advanced for 23 of the last 30 weeks, marking a joint record since 1989, but yesterday it fell -0.74%, and futures this morning are down again so it’s clear that the momentum is now more negative.

As DB’s Henry Allen writes, “markets have had another rough 24 hours, with no sign of the negative momentum letting up overnight. The latest selloff has been driven by a range of factors, but bonds took a particular hit after a weak US Treasury auction yesterday, along with mounting concern about inflationary pressures, which sent European yields up to their highest levels in months.”

BlackRock is sticking to the front end and the belly of the US Treasuries curve as optimism over US easing fades, according to Karim Chedid, the firm’s investment strategy head for EMEA.

“We see that as the area where you’re still getting the most bang for buck in terms of income for stability,” he said in an interview with Bloomberg Television. While the scorching rally in tech companies is underpinned by fundamentals and remains one of BlackRock’s “key sector overweights,” Chedid says he’s seeing growing inflows into European and Japanese equities.

The prospect of a rate cut from the European Central Bank at its June meeting is helping, as is “a bottoming out in the macro data in Europe, which investors are liking,” Chedid said. “Earnings have seen a significant upgrade in Europe over the past 12 months.”

And speaking of the coming ECB rate cut, European stocks are in the green after two days of losses, with telecommunication and bank shares leading gains. Major markets are all higher with Spain the notable outperformer. While some inflation prints have disappointed, the ECB remains on track to launch its easing cycle next week. Regional bonds are seeing a relief rally with Gilts curve the largest mover, seeing bull steepening. Banks among the biggest beneficiaries in EU while UK is seeing add’l support from Cyclicals. Here are the biggest movers Thursday:

• Auto Trader rises as much as 14%, hitting a record high, after the online car marketplace posted FY revenue and profit that beat expectations and said the new financial year has started well
• European renewables stocks are lifted by a renewed focus on M&A after Brookfield announced it is in exclusive talks to acquire a majority stake in French renewable energy developer Neoen
• BW LPG gains as much as 12% and to a fresh record high after the Norwegian LPG shipper reported a “solid” first-quarter beat and provided “positive” second-quarter guidance, DNB says
• Dr Martens rises as much as 11% after the bootmaker reported full-year results. While revenue and Ebitda for the period missed estimates, the company announced a cost savings plan
• YIT rises as much as 12%, hitting the highest since April 2023, as Danske Bank double-upgrades the Finnish construction services firm, giving the stock its sole buy rating
• De La Rue shares climb as much as 9.2% after the banknote maker said it’s in talks with potential buyers for some of its business divisions, but also said there is no certainty of a deal
• Telecom Italia shares fall as much as 9.2% as the telecom operator reported results that showed still challenging trends in Italy as pace of its mobile and broadband subscriber loss quickened
• NKT falls as much as 4.5%, the most since April 22, after Carnegie cut its recommendation for the Danish power cable manufacturer to hold from buy, awaiting “the next leg in the case to unfold”
• Pirelli shares fell as much as 5.8% in Milan trading after shareholder China’s state-backed Silk Road Fund Co. disposed of its stake in the Italian tiremaker
• European software stocks drop after US peer Salesforce gave a weak outlook, spurring worries over a slowdown in the sector more broadly and the firm’s relevance amid the advancement of AI
• South Africa’s main stock index falls 1.8%, the most in more than six weeks, as initial projections of results in Wednesday’s election show a marked decline in support for the ruling ANC party

Asian stocks extended declines into a third session, led by drops in Japanese and Korean equities, as higher US Treasury yields sapped the appeal of riskier assets. The MSCI Asia Pacific Index fell as much as 1.2% to touch its lowest level in three weeks, with TSMC, Samsung and Toyota among the biggest drags. The regional tumble comes after another weak sale of Treasuries reinforced concerns about the impact of higher yields. Japan’s key benchmarks retreated as the country’s long-term yields continued to rise. The yen briefly fell through a level that prompted the latest round of suspected action by Japan to prop up the currency. The Kospi dropped, dragged by losses in Samsung after the firm’s labor union said Wednesday it plans to carry out its first strike ever.

“Asian markets are clearly taking a cue from the US session marked by higher correlation and volatility,” said Homin Lee, a senior macro strategist at Lombard Odier. “We see signs that investors are still nervous about major policy innovations in Japan and China where the recent attempts to tackle the respective macro challenges – real estate in China and currency weakness in Japan – seem to have underwhelmed the markets and need to be ramped up even further,” Lee said.

In rates, treasuries pare some of their recent decline. US 10-year yields are down 2bps at 4.59%, having risen almost 15bps in the prior two sessions; they remain near the highest levels this year as optimism over US rate cuts fades. Gains were led by gilts as European bonds also recoup some of Wednesday’s losses. 2s10s and 5s30s curves remain notably steeper on the week.

In FX, the dollar erased earlier gains to fall modestly, paring Wednesday’s 0.5% advance; the Japanese yen rebounds after falling through a level that prompted the latest round of intervention by authorities. USD/JPY is down 0.5% near 156.88 after hitting a four-week high late Wednesday at 157.71. The Swiss franc is the strongest in G-10 FX, rising 0.7% against the greenback after SNB President Jordan warned a weaker currency is currently the most likely source of higher inflation and could be offset with FX sales. The rand extended losses and banking stocks fell as South Africa’s election vote count gathers pace. The ruling party looks set to fall well short of obtaining a parliamentary majority for the first time since it came to power.

In commodities, crude slipped as traders look to US stockpile data and an OPEC+ meeting on the weekend for more clarity on the supply and demand outlook. WTI traded near $79.10 while Brent was at $83.50. Spot gold falls $3 to around $2,335/oz.

Bitcoin is modestly firmer and holds around $68k, while Ethereum continues to lose ground.

Looking to the day ahead now, US economic data includes second estimate of 1Q GDP, initial jobless claims, April wholesale inventories, advance goods trade balance (8:30am) and pending home sales (10am). Fed officials’ scheduled speeches include Williams (12:05pm) and Logan (5pm)

Market Snapshot

• S&P 500 futures down 0.5% to 5,260.00
• STOXX Europe 600 up 0.2% to 514.64
• MXAP down 1.0% to 176.44
• MXAPJ down 1.2% to 550.15
• Nikkei down 1.3% to 38,054.13
• Topix down 0.6% to 2,726.20
• Hang Seng Index down 1.3% to 18,230.19
• Shanghai Composite down 0.6% to 3,091.68
• Sensex down 0.6% to 74,021.56
• Australia S&P/ASX 200 down 0.5% to 7,628.20
• Kospi down 1.6% to 2,635.44
• German 10Y yield little changed at 2.66%
• Euro little changed at $1.0809
• Brent Futures down 0.3% to $83.36/bbl
• Gold spot down 0.2% to $2,333.60
• US Dollar Index down 0.11% to 105.01

Top Overnight News

• Market pressure is growing on the PBOC to allow the renminbi to weaken, as traders bet that the yawning gap with US borrowing costs will lead more investors to sell out of the Chinese currency. China’s central bank has maintained a strong yuan policy so far this year, keeping its daily fixing — or reference rate around which the currency is allowed to trade — within an unusually narrow range of 7.09 to 7.11 against the US dollar. FT
• China is poised to impose a record fine on PwC of at least 1 billion yuan ($138 million) and suspend some of its local operations over its role in the alleged fraud at Evergrande, people familiar said. BBG
• Global sovereign bond markets are facing the biggest month of supply so far this year in June ($340B worth of net paper needs to be absorbed from the US, EU, and UK next month). RTRS  
• Spain’s EU harmonized CPI for May came in at +3.8%, a 40bp acceleration vs. +3.4% in Apr and higher than the Street’s +3.7% forecast (the rise was driven by an electricity tax increase). RTRS
• Washington is concerned about Ukrainian strikes against Russian radar systems used by Moscow to detect nuclear weapons attacks (the Pentagon is worried this could upset the strategic balance between the US and Russia). WaPo
• UBS appointed investment bank head Rob Karofsky to run its US business and jointly oversee the wealth unit with Iqbal Khan, in a management shakeup that may make them prime contenders vying to succeed CEO Sergio Ermotti. BBG
• The Fed’s Raphael Bostic said many inflation measures are moving back to their target range. He said if prices and the labor market move to a more “stable-growth stance,” officials may be prepared to cut rates in the fourth quarter. BBG
• US crude inventories fell by 6.5 million barrels last week, the API is said to have reported. That would be the largest drop since January, if confirmed by the EIA today. BBG
• AMZN has added the Grubhub food delivery service directly to its app and website, deepening an existing partnership between the two companies (Amazon Prime members already have a free Grubhub+ membership). RTRS
• Fed’s Bostic (voter) said the inflation path will be bumpy but the general trend is down and the path to 2% inflation is not assured, while he added that the Fed is vigilant and the job market is tight but not as tight. Furthermore, he said the breadth of price gains is still pretty significant and less inflation breadth would add to confidence for a cut.

A more detailed look at global markets courtesy of Newsquawk

APAC stocks were on the back foot amid spillover selling from Wall St owing to the further upside in yields. ASX 200 was pressured with underperformance in miners after recent declines in underlying commodity prices. Nikkei 225 slumped at the open and briefly fell beneath the 38,000 level but is well off worse levels. Hang Seng and Shanghai Comp conformed to the uninspiring mood in which the Hong Kong benchmark gradually weakened with notable losses in mining and property stocks, while the mainland was rangebound following another substantial liquidity injection by the PBoC and after the central bank also vowed several support efforts including promoting trade and investment facilitation.

Top Asian News

• PBoC Deputy Governor Tao Ling said they will coordinate the relationship between short-term tasks and long-term goals, stable growth and risk prevention, and internal and external balances, as well as accelerate implementation and effectiveness of a relending facility for science and technology innovation. Tao said they will promote trade and investment facilitation, support the development of the offshore yuan market and support small- and medium-sized tech firms’ first-time loans and equipment upgrades in key areas with big efforts.
• Chinese President Xi said at the China-Arab States Cooperation Forum that China is willing to build China-Arab relations as a benchmark for maintaining world peace and stability, while China is ready to work with the Arab side to explore ways to resolve hotspot issues conducive to upholding fairness, justice and achieving long-term peace and stability. Furthermore, he said China will accelerate the building of a China-Arab community of a shared future, as well as build a larger-scale investment and finance landscape with the Arab side.
• US officials reportedly escalated a crackdown on the controversial customs exemption that Temu, Shein and other e-commerce firms use to send cheap items from overseas to American shoppers without paying tariffs, according to The Information.
• RBA chief economist Hunter said they agree with the Treasury forecast on inflation and noted that CPI confirmed there was strength in some price sectors. Hunter added the Board is focused on inflation staying out of the band and there is strength in the inflation.
• PBoC says it is playing close attention to current bond market changes and potential risks; will sell low risk bonds including govt bonds when necessary.
• Some of China’s regional authorities reportedly are guiding firms to slow purchases of foreign currencies in a sign the nation is taking further measures to discourage capital outflows amid yuan weakness, according to Bloomberg.

European bourses, Stoxx 600 (+0.2%) began the session on a mostly softer footing, continuing the price action seen in APAC trade overnight; however, sentiment improved as the morning progressed, with indices climbing modestly into the green. European sectors hold a positive bias; Tech is the clear laggard, with sentiment in the sector hit following weak guidance from Salesforce (-16% pre-market), which has weighed on peers such as SAP. Basic Resources is hampered by broader weakness in metals prices. US Equity Futures (ES -0.4%, NQ -0.4%, RTY +0.1%) are mixed, though have been edging higher in recent trade, in tandem with the broader pick-up in European stocks.

Top European News

• UK PM Sunak promises interest rate cuts if he wins the election, according to The Times. PM Sunak said the economy was ‘heading in the right direction’ and that a vote for the Tories is a vote for cuts to interest rates as he set out a vision for a “more prosperous, more secure, more united country” if he wins the election.
• British Chambers of Commerce business lobby group said the next UK government must forge better trade relations with Europe and warned that companies face ever higher costs stemming from Brexit, according to FT.
• ECB is to impose the first-ever fines on banks for climate failures.

FX

• DXY is lower and sitting just beneath the 105 mark after popping above its 50DMA at 105.09 and advancing to a 105.18 peak. US yields have been viewed as one of the main drivers for the USD’s rise this week, as attention turns to the second reading of US Q1 GDP, PCE and Initial Jobless Claims later today.
• EUR/USD has moved back onto a 1.08 handle and in close proximity to its 100 DMA (1.0807) after slipping as low as 1.0789; which is just above the 200DMA at 1.0786.
• Cable is currently hugging the 1.27 mark, whilst EUR/GBP has moved back onto an 0.85 handle. Newsflow for the UK remains light aside from noise surrounding the general election.
• JPY is the best performer across the majors with some pinning the move on the recent bout of risk-aversion. USD/JPY continues to pullback from yesterday’s 157.71 peak which was the highest since May 1st.
• Antipodeans are both muted vs. the USD. AUD/USD has been oscillating around the 0.66 mark in quiet trade with focus in part on fluctuations around the CNY (see below); today’s 0.6591 was the lowest print since 14th May.
• USD/CNY is moving ever closer to the 7.25 mark with increasing speculation over how long the PBoC will keep the USD/CNY fix steady.
• ZAR has lost ground vs the Dollar as models predict that the ruling ANC party could lose its outright parliamentary majority. Further reports that suggest ANC is likely to get around 45% (prev. reports of 42.3%) helped to spark some modest upside for the ZAR; SARB Policy Announcement is also due today.
• PBoC set USD/CNY mid-point at 7.1111 vs exp. 7.2623 (prev. 7.1106).
• SNB’s Jordan said there is a small upward risk to the SNB’s inflation forecast and reasons to believe the natural rate of interest has increased or might rise, while he added that a weak CHF is the most likely source of inflation.
• South African Election Commission: Governing African National Congress (ANC) is on 42.3% of the vote with 10% of polling stations reported; thereafter, South Africa’s ruling ANC party could win 41.5% of votes, according to Bloomberg citing a model.
• Most recently, South African Broadcaster ENCA says ANC is likely to get around 45% of the national vote and will fall short of a majority

Fixed Income

• USTs have bounced modestly following Wednesday’s soft 7yr auction, in part thanks to a robust JGB auction. USTs are near highs of 108-09+ vs Wednesday’s 107-31 post-auction WTD base.
• Bunds are following USTs/JGBs but with magnitudes slightly more contained; Spanish harmonised inflation metrics Y/Y ticked up slightly, though was unable to spark any material move. Bunds up to a 129.23 peak.
• Gilt price action is following peers, going as high as 95.81 but someway to go before a retest of 96.43, 97.09 and 97.32 highs from earlier in the week.
• Italy to sell EUR 7.5bln vs exp. EUR 6-7.5bln 3.35% 2029, 3.85% 2029, 3.85% 2034 BTP and EUR 2bln vs exp. EUR 1.5-2bln 2029, 2032 CCTeu

Commodities

• Subdued trade for the crude complex as prices continue to trim the gains seen earlier this week and as attention turns to the OPEC+ confab on Sunday; Brent Aug sits between a 82.94-83.58/bbl range.
• Another downbeat session for precious metals despite the softer Dollar amid an intraday pullback in yields. Spot gold sees its losses more cushioned vs silver and palladium after the yellow metal found support near its 50 DMA; XAU trades within a USD 2,322.66-2,339.95/oz parameter.
• A devastating session for base metals thus far following the recent rise in yields and the Dollar, whilst the downbeat mood across Chinese markets overnight only added the pessimism in the complex.
• US Private Energy Inventory Data: Crude -6.5mln (exp. -2mln), Cushing -1.7mln, Distillates +2mln (exp. -0.2mln), Gasoline -0.5mln (exp. -0.5mln).

Geopolitics

• Israel’s army said Hamas is in Rafah and is holding Israeli hostages, so they are launching military operations there and will not stop fighting in Rafah until the hostages are freed.
• US official said the US is to boycott UN tribute to Iran’s late President Raisi on Thursday, according to Reuters.
• “Hearing from sources that American resistance to the E3 censure resolution (on Iran) is fading; recognising the reality that E3 are pushing ahead”, according to WSJ’s Norman
• Russian Foreign Minister Lavrov said China could arrange a peace conference in which Russia and Ukraine would participate, while he added that Russia regards planned supplies of F-16 fighters to Ukraine as a “signal action” by NATO in a nuclear area, according to RIA.
• North Korea fired what was suspected to be a ballistic missile which fell shortly after the launch announcement and appeared to have landed outside of Japan’s exclusive economic zone, according to the Japanese Coast Guard and press. It was later reported that South Korea said North Korea fired what appeared to be multiple short missiles that flew about 350km.
• China’s Defence Ministry says the recent Taiwan drills “reached expected goals”

US Event Calendar

• 08:30: 1Q GDP Annualized QoQ, est. 1.3%, prior 1.6%
  • 1Q Personal Consumption, est. 2.2%, prior 2.5%
  • 1Q Core PCE Price Index QoQ, est. 3.7%, prior 3.7%
  • 1Q GDP Price Index, est. 3.1%, prior 3.1%
• 08:30: May Initial Jobless Claims, est. 217,000, prior 215,000
  • May Continuing Claims, est. 1.8m, prior 1.79m
• 08:30: April Wholesale Inventories MoM, est. 0.1%, prior -0.4%
  • April Retail Inventories MoM, est. 0.3%, prior 0.3%
  • April Advance Goods Trade Balance, est. -$92.3b, prior -$91.8b
• 10:00: April Pending Home Sales (MoM), est. -1.0%, prior 3.4%
  • April Pending Home Sales YoY, est. -2.0%, prior -4.5%

Central Bank speakers

• 12:05: Fed’s Williams Speaks at Economic Club of New York
• 17:00: Fed’s Logan Speaks in Moderated Q&A

DB’s Jim Reid concludes the overnight wrap

Markets have had another rough 24 hours, with no sign of the negative momentum letting up overnight. The latest selloff has been driven by a range of factors, but bonds took a particular hit after a weak US Treasury auction yesterday, along with mounting concern about inflationary pressures, which sent European yields up to their highest levels in months. That followed on from a hawkish set of headlines the previous day, where stronger-than-expected data led investors to price in that rates would stay higher for longer. So it was a tough backdrop for markets across several asset classes, and there had already been a relentless run of gains in recent weeks that was always going to be tough to maintain. Indeed, the S&P 500 has advanced for 23 of the last 30 weeks, marking a joint record since 1989, but yesterday it fell -0.74%, and futures this morning are down -0.56%. So it’s clear that the momentum is now more negative, and Asian markets are also falling across the board as we go to press this morning.

This negative tone was set from the outset yesterday after the Australian CPI report was higher than expected. But that was compounded by the German flash CPI print for May, which was also a bit above consensus. So that helped to deepen the selloff, adding to concerns that rates were set to remain at higher levels for longer than anticipated. In terms of the details, German inflation came in at +2.8% on the EU-harmonised measure, which was a tenth above expectations, and an increase from the +2.4% print in April. That was partly down to base effects, but the main significance of the release was that it cast doubt on how aggressively the ECB would cut rates over the coming months. Indeed, the amount of ECB rate cuts priced by April 2025 came down by -8.0bps to 75bps, so markets are now pricing in a shallower easing cycle after the release. We’ll get more European inflation data over the next couple of days, including from Spain today, before we get the Euro Area-wide release tomorrow.

The stronger inflation prints affected sovereign bonds across the world, but the impact was particularly noticeable in Europe ahead of the ECB’s decision next week. For instance, the 10yr bund yield was up +9.8bps to a 6-month high of 2.69%. But that wasn’t just confined to Germany, as the 10yr yield in France (+10.2bps) was also up to a 6-month high of 3.17%, and the UK 10yr gilt yield (+11.9bps) hit a 6-month high of 4.40%. Meanwhile at the front-end of the curve, the German 2yr yield (+4.3bps) hit a 7-month high of 3.10%, moving closer to its March 2023 peak (just before the SVB turmoil) at 3.33%.

That pattern was repeated in other regions, and the 1 0yr Treasury yield ended the day up +6.2bps at 4.61%. In fact, over the last two weeks, the 10yr yield is now up +27.3bps, so there’s been a big turnaround since the rally that followed the US CPI print. At the same time, the 2yr yield (-0.4bps) closed at 4.97%, just below the 5% mark again, whilst the 2yr real yield moved as high as 2.70% intraday before ending up +1.7bps at 2.68%. This came as there was weak demand for US Treasuries for a second straight day. The US sold $44bn of 7-yr notes at 4.65%, which was higher than the pre-auction level of 4.637%, as concerns over funding the US deficit in a higher rate world continued to percolate. Additionally, Fed pricing suggested that higher rates were set to persist, and this morning futures are putting a 48.5% probability on a rate cut by the September meeting. There was also a modest support from the Richmond Fed’s manufacturing index, which rose to 0 in May (vs. -7 expected), which is the strongest it’s been in 7 months.

This rise in longer-dated yields proved bad news for global risk assets. For equities, it meant the S&P 500 fell -0.74%, which currently puts the index on track to end a run of 5 consecutive weekly gains. Moreover, that decline was cushioned by a stronger performance for the Magnificent 7 (-0.08%), which only fell modestly from its all-time high the previous sessio n. So if you look at the equal-weighted S&P 500 instead, that actually fell by a larger -1.17%. So this continues the theme from last year where the equity rally is a very narrow one, as the overall S&P 500 is up +10.42% year-to-date, but the equal-weighted version is only up +2.96%. Every industry group in the index was lower by the close, with energy stocks (-1.76%) as the main underperformer after oil prices fell back (Brent Crude -0.74%). Meanwhile in Europe, the losses were even larger, and the STOXX 600 fell -1.08%, alongside declines for the DAX (-1.10%), the CAC 40 (-1.52%) and the FTSE 100 (-0.86%).

Overnight in Asia, this weakness for risk assets has continued, with losses for the KOSPI (-1.41%), the Nikkei (-1.37%), the Hang Seng (-1.22%), the CSI 300 (-0.16%) and the Shanghai Comp (-0.12%). Futures are also pointing to losses in other regions, with those on the DAX down -0.38%, and those on the S&P 500 down -0.56%.

To the day ahead now, and data releases include the Euro Area unemployment rate for April, and in the US we’ll get the second estimate of Q1 GDP, along with the weekly initial jobless claims, the advance goods trade balance for April, and pending home sales for April. From central banks, we’ll hear from the Fed’s Williams and Logan, along with the ECB’s Makhlouf.

Beijing has halted US beef imports from JBS SA’s meat processing plant in Greeley, Colorado, after detecting traces of ractopamine in the beef intended for China.

Brazil-based JBS, the world’s largest beef producer, wrote in a statement, “We’re working diligently with US and Chinese authorities to resolve the situation as soon as possible.”

Bloomberg said JBS’ Greeley location is the only US meat processing plant affected by the Beijing import suspension. The suspension notice was first posted on the US Department of Agriculture’s Food Safety and Inspection Service website. 

In recent months, major food safety, environmental, and animal rights groups, including the Center for Food Safety, the Center for Biological Diversity, the Animal Legal Defense Fund, and others, have filed a lawsuit in federal court. They claim that the Food & Drug Administration has been turning a blind eye to requests for a review for ractopamine. This controversial drug has been banned not only in the European Union, Russia, and China but also in over 160 countries worldwide. 

The lawsuit cites a study of ractopamine’s impacts on human health. The study was discontinued because low doses administered to patients increased heart rate significantly. Farmers use the drug to promote muscle growth in pigs, turkeys, and cows. 

In 1999, ractopamine for farm animals was approved by the FDA. By 2009, the EU banned the drug after finding data that did not support a conclusion that the drug was safe. 

“The move from China is a blow to JBS beef operations in the US at a time when scarce cattle supplies have sent costs surging and eroded beef producers’ profits,” Bloomberg added. 

It’s time more Americans understood the chemicals the food industry complex puts in food and how they can lead to diseases. But don’t worry—the pharmaceutical-industrial complex has a drug for that. 

America’s favorite primetime judge took to Fox News this week to deliver a scathing verdict on progressive district attorneys across the United States, suggesting they’d be better suited selling ice cream cones for a living.

Speaking to Fox News Digital this week, the Judge said: “When you have district attorneys who are charged, whose job it is to do justice, but to keep the community safe … When you have elected district attorneys who don’t know what their job is, they should go find another job.”

“Fill ice cream cones someplace. But don’t ruin cities,” she added. 

She continued, telling Fox News that DAs were the reason many U.S. cities were seeing people leaving: “And what’s happened around New York City, Portland, San Francisco, you had district attorneys who didn’t know what their job was. And the cities are ruined, people are leaving.”

She pointed out the backward nature of how criminals are now incentivized and victims are punished, stating: “I know how we got here. We got here because a small group of people who have very loud voices created a scenario where bad people got rewarded. And the victim got punished by the system.” 

“You know there is always a reason for criminal behavior — didn’t have a good upbringing, didn’t have two parents in the house, didn’t have one parent in the house,” the former family court judge added.

“There’s always a reason. You’re mentally ill. That’s a reason. You took drugs, that’s a reason. You took alcohol, your brain is fried… Whatever it is.” 

“And when society started to make excuses for bad behavior, and react to criminality based upon the excuses, it fell apart,” she added.

She was also critical of New York’s decision to raise the minimum age to try criminals as adults to 18: “You’re just as dead as somebody 18 kills you, or 17.”

“You’re just as dead. And if you’re 17 years old and kill somebody, you don’t belong with kids who are 12, in a juvenile facility… But a very small group of people pushed through in New York State, for instance, raising the level of criminal responsibility.” 

“I think we better get smarter before we get lost … Permanently lost,” she concluded.

Via SchiffGold.com,

Central bank gold buying has been a significant factor in the yellow metal’s spectacular run-up to new record highs. But with its recent small correction downward, it’s a good time to look at which central banks are selling — and why.

Gold vs USD, 1-Month Chart, Source: Bloomberg

For one, Thailand has been selling the gold top to help rebalance its reserves. However, the biggest central bank gold seller by far is currently Uzbekistan, and has been for some time. The country has better reasons than most to sell the top and pull in some revenue: Uzbekistan bought a lot of gold when prices were lower, but even more importantly, they’re one of the world’s top 10-12 producers and exporters of gold in the world.

Being a producer helps reduce some of the pressure to hold as much gold as possible as global inflation continues to run hot, conflict in the Middle East drags on, and the ongoing war continues to rage between nearby Russia and Ukraine.

However, Uzbekistan’s major problem with gold is one of overdependence — they don’t have a lot of other revenue sources, are heavily indebted, and have leaned on gold sales to replenish their treasury without any major economic reforms to reduce the degree to which it has to lean on gold exports. If gold crashes, the central bank and government have few solid resources to soften the blow. Thankfully, if you zoom out, gold always trends up as central banks devalue their currencies — but Uzbekistan doesn’t have other tools to work with during gold’s major drawdowns.

Likewise, if there are disruptions around Uzbekistan’s gold mining industry that hamper its discovery, production, or export, the Uzbekistan central bank is left without equally effective measures to prop up the som, its troubled national currency. With gold’s rise, becoming one of the world’s biggest sellers allowed Uzbekistan to prop up the som against the US dollar — but without its stash of gold, the country’s economy and currency would be in a huge heap of trouble.

UZS vs USD as Uzbekistan Sells Gold, Source: Bloomberg

With gold currently raging, there’s also less incentive for the government to push to innovate and fix its more fundamental issues, since it can lean on high gold prices to keep itself afloat and pay back debtors, like the $1 billion that just came due on a 2019 Eurobond. 

One major reform effort was a new rule allowing anyone to look for gold, in an effort to increase gold production and overall employment. And while it has helped somewhat, making fewer Uzbekis dependent on Russia for jobs, it only increases the country’s broader gold dependence.

Luckily for Uzbekistan, inflation will continue to worsen as central banks and governments scramble (and fail) to contain it, which will push commodities like gold higher. Meanwhile, countries like China continue their massive buying sprees and help prop up bull markets further. That means that Uzbekistan will probably continue to sell and reap the benefits of profit-taking, likely remaining one of the world’s major sellers in the coming months and years.

Without other economic tools, however, it can’t just rely on selling gold as a shortcut to prosperity on the global stage. Then again, if major currencies start to fall due to central bank hubris and out-of-control debt, perhaps gold will soar high enough that an overdependent country like Uzbekistan will have a (literal) golden opportunity to invest heavily into other areas, building itself up from the ashes of the self-destruction of Western fiat currencies.

For now, however, all that glistens in Uzbekistan’s economy is gold.