U.S. equities declined on Tuesday leaving key indices little changed for the month, while Treasury yields rose following Federal Reserve Governor Christopher Waller’s more hawkish comments on Monday.
The S&P500 declined -0.63% on Tuesday weighed by declines in health care -1.37% and technology -0.70% while energy paced losses -1.65% as consumer discretionary was the best performing sector, up +0.76%. The Dow Jones was also -0.67% lower, as was the Nasdaq Composite -0.41% and Russell 2000 -1.26%, although the VIX edged -1.32% lower to 26.19. The volatile month left key indices essentially unchanged for the month, which saw the S&P500 surge more than +8% after falling to within points of a -20% drop from all-time highs, widely considered as signalling a bear market.
Treasury yields climbed following the re-opening of cash markets after Fed Governor Christopher Waller’s hawkish comments on Monday that +0.50% rate increases should be considered on the table until inflation is moving down towards its 2% target. The 2-year yield climbed +8.1% basis points to 2.556%, as did both the 10 and 30-year yields up +11 and +8.8 basis points respectively. Market pricing based on futures suggests the market expects a +0.50% increase at the Fed’s June and July meetings, with a 50% chance of a similar hike in September and an implied policy rate of 2.735% by the end of the year from the current +0.75% rate.
In economic data, U.S. consumer confidence declined in May to 106.4 from a revised higher 108.6 in April, which was higher than the forecast 103.6 with both present situation and future expectation survey’s also declining. According to Bloomberg economists, “Despite high inflation eroding real incomes, consumers are willing to dip into their savings to finance purchases of goods and services. We expect personal consumption to post a solid gain this quarter but see souring sentiment eventually catching up and dampening spending”, also noting consumers were increasingly turning towards the use of credit cards to fund purchases. Elsewhere, President Biden is set to have a rare meeting with Fed Chair Jerome Powell on Tuesday night U.S. time amid the highest inflation in decades which has hurt Biden’s standing with voters. According to a White House statement, the two will discuss the American and global economies.
European equities also declined on Tuesday after inflation in the Eurozone reached record highs driven by energy and food costs. Headline inflation year-on-year to May rose +8.1% from +7.4% previously, surpassing estimates of +7.7% with core inflation rising more than forecast to +3.8% from +3.5% over the same period. The figures come ahead of an ECB policy meeting next week where it is widely expected to signal the end of large-scale asset purchases and outline the path to raising rates, while rates are not expected to be increased at the meeting, the latest inflation print certainly increases the potential for a surprise increase as well as intensifies the debate about how quickly the central bank will need to raise rates. The Euro Stoxx 600 declined -0.72%, as did the DAX -1.29%, and CAC -1.43% with benchmarks lower across the region with the exception of the FTSE100 which edged +0.10% helped by a +9.43% gain in Unilever shares after activist investors Nelson Peltz joined its board.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
The ASX looks set to open lower this morning with ASX200 futures down -25 points or -0.35% to 7,187. The index finished -1.03% lower on Tuesday with all sectors lower, paced by financials -1.99%, technology -1.95% and communications -1.68%. Materials finished -0.25% lower despite a jump in commodity prices after the Chinese government eased COVID-19 restrictions and reported fewer than 100 new cases on Monday. In economic data, ANZ business confidence for May declined to -55.6 from -42 previously, while building permits for the month of April declined -2.4% missing estimates of a +2% increase. The Australian dollar is -0.26% weaker overnight at 0.7177 while the yield on 10-year government bonds rose +9.6 basis points to 3.351% tracking U.S. bond markets. Domestic investors will be focused on the release of Q1 GDP figures at 11:30 AEDT, forecast to show the economy expanded at a +0.7% over the quarter, down from +3.4% in Q4 2021, with the economy growing at +3.0% over the year, down from +4.2% previously.
Oil prices retreated after initially surging following the European Union announcing sanctions on Russian oil, with both WTI and Brent crude -0.35% and -1.21% lower after initially rising over +4%. Iron ore futures in Singapore finished -0.18% lower on Tuesday and are a further -2.12% weaker this morning at US$130.30. Gold weakened -0.96% to US$1,837.35 an oz weighed by higher U.S. nominal and real yields, silver also declined -1.93% to US$21.55 with Bitcoin +1.70% higher at US$31,788.
Economic data:
- Australian Manufacturing PMI (MoM may) 09:00
- Australian GDP (QoQ Q1) 11:30
- Eurozone Manufacturing PMI (MoM May) 18:00
- Eurozone Unemployment (MoM mar) 19:00
- U.S. ISM Manufacturing PMI (MoM May) 00:00
- Fed Williams Speech 01:30
This article was written by James Woods, Portfolio Manager, Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3632.
