US equities climbed to a nine-month high on Thursday over optimism US debt ceiling negotiations were progressing.
United States
Equities in the US rallied on positive signs of the debt-ceilings negotiations could be resolved as soon as the weekend with House Republican leader Kevin McCarthy stating the negotiations were in a “much better place” now. Economic data released on Thursday showed 1799k individuals applied for unemployment in May, falling below forecasts of 1818k. The number of fresh individuals applying for unemployment fell by 22k to 242k in May, lower than the forecast 254k although the numbers were heavily skewed following a slump in filings in Massachusetts.
Meanwhile, comments from Federal Reserve officials presented a mixed outlook with Dallas President Lorie Logan noting the case for a pause was not clear, while Fed Governor Philip Jefferson said they are watching for the impact of tightening which has a lag. A slew of Fed speakers this week has seen traders reprice the probability of a pause in June, with roughly a 35% probability of a 0.25% increase now priced in from near zero recently with the main focus on a speech by Fed Chair Jerome Powell tonight. As we have mentioned previously, there is little incentive for Fed officials to ease off from their hawkish rhetoric given the importance of maintaining their credibility and achieving their inflation target. However, monetary policy operates with a lag, and the recent banking turmoil and tightening of credit conditions will assist to slow the economy and bring down inflation. Additionally, forward-looking indicators continue to point to a slowdown and what would appear to be a modest recession at this stage with the Conference Board’s leading index for April adding weight to this, declining -0.6% over the month as expected. While we believe the most logical path is a pause to give more time to assess incoming data, what the Fed will actually do versus market pricing are often two completely different outcomes.
US Conference Board Leading Index (MoM) source: Bloomberg
Morgan Stanley Private Wealth Management’s Katerina Simonetti commented on the Fed’s expected decision on interest rates, “The big decision for them is the timing because once they announce that they’re done raising rates, markets are just going to assume that they’ve succeeded. And it might not necessarily be the case. Inflation so far is proving to be sticky”.
The S&P 500 closed 0.94% higher on Thursday. Information technology rose by 2.06%, communications were up by 1.79%, and consumer discretionary added 1.54%. Real estate, consumer staples, and utilities closed -0.68%, -0.44% and -0.36% lower respectively. The Dow edged up by 0.34%, the Nasdaq by 1.51% and the Russell 2000 Index firmed 0.58%. The yield on the 2-year US treasury bond was 4.25%, while the yield on the 10-year and 30-year bonds was 3.64% and 3.90% respectively. The VIX index retreated -4.86% to 16.05. In corporate news, the share price of Netflix climbed 9.9% after announcing their ad-supported tier reached 5 million active users per month. Cisco meanwhile slid -1.7% after the company reported a decline in product orders from customers. Walmart rose 2.8% on improved future sales and profit guidance.
Europe
In Europe, the STOXX 600 Index closed 0.46% higher on Thursday, boosted by increased sentiment over progress in US debt ceiling negotiations. The index was boosted by the information technology sector jumping 3.07%, industrials added 0.80% and financials edged up 0.76%. The biggest laggard was the utility sector which closed -1.90% lower. Real estate was down by -1.51% and communications slid -0.25%. The DAX gained 1.33%, the CAC rose by 0.64%, and the FTSE index climbed 0.14%. In corporate news, BT Group slumped as much as -10% before finishing -5% lower after announcing plans to cut its labour force by as much as 42% over the next seven years.
Economic data out of Russia showed the economy shrank by -1.3% during the first three months of 2023, far better than the expected -3% decline and an improvement compared to the -2.7% decline during the last quarter of 2022. The G7 is also expected to increase sanctions on Russia’s exports.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
Australia
The ASX 200 is expected to open higher on Friday, with ASX futures up 17 points or 0.23% to 7,276. The ASX 200 index was up by 0.52% at the end of trading on Thursday and closed at 7236.8. Information technology was on the leader board climbing 2.91%, followed by materials gaining 1.19% and energy up by 0.88%. The biggest laggards were real estate, healthcare, and consumer discretionary, all declining between-0.31 to -0.37%. The star performer of the index was Nufarm up rocketing 14.15%. The company reported interim net profit was up 51% to $149 million, despite revenue declining by -1% to $2 billion. Xero made headlines rising 8.9%, after shareholders cheered the company’s cost-cutting program which added to cash flows. In materials, Mineral Resources climbed 5.3%, Pilbara Minerals firmed 3.8%, Rio Tinto gained 1.4%, BHP rose by 1.2%. Meanwhile, Beach Energy fell by -4.26% and Lake Resources was down -3.88%.
Economic data showed the unemployment rate rose from 3.5% in March to 3.7% in April. The Australian Bureau of Statistics revealed 4,300 individuals lost work in April, contrary to economist forecasts of adding 25k jobs. The local currency weakened against the dollar by -0.8% to 0.66, while the yield on the policy-sensitive 3-year government bond was 7.8 basis points higher at 3.21%. Monthly CPI data for April is the final piece of key economic data at the end of the month before the RBA meets in early June. Should we continue to see a steady downtrend in price pressures following the weaker employment report, it would only add weight to the case for the RBA to remain on pause, despite its projections that rates need to move above 4%.
Australian Unemployment (MoM) source: Bloomberg
Commodities
In commodities, oil prices were hit by the expectation of higher interest rate hikes by the Fed would impact demand as the US economy was headed for recession. WTI and Brent crude prices fell by -1.33% and -1.29% to $71.86 and $75.97 respectively. The prices of precious metals remained flat on Thursdays with spot gold closing at $1,957.48 and spot silver at $23.49. Industrial metals were mixed with copper declining by -1.64% to $368, nickel rising 1.07% to $21,272, and SGX Iron Ore declining by -1.21% and is a further -2.68% lower this morning at US$104.15. Meanwhile the price of Bitcoin fell -1.9% to $26,608.
Economic Calendar
19th May 2023
Japan Inflation Rate (YoY April) 09:30
Canadian Retail Sales (MoM) 22:30
US Fed Williams Speech 22:45
US Fed Bowman Speech 23:00
20th May 2023
US Fed Chair Powell Speech 00:55
ECB President Lagarde Speech 05:00
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.
