U.S. equities declined on Wednesday while Treasury yields climbed after strong economic data suggested the Federal Reserve has not yet slowed growth enough to tame inflation, while members of the Federal Reserve suggested a continued aggressive path of rate hikes.
An unexpected advance in U.S. manufacturing activity for May coupled with a high level of job openings added to concerns the Federal Reserve will need to continue to be aggressive to slow the economy and prices. The ISM Manufacturing PMI report for May climbed to 56.1 from 55.4 compared to estimates of a decline to 54.5 with the report pointing to strong demand and continued input strains. While there were some signs of easing price pressures with input prices increasing at a slower rate of 82.2 from 84.6 previously, this was still above estimates and commentary in the report warned that “price increases haven’t let up”. Meanwhile, the JOLTS job opening report, while declining in April pointed to a tight labour market with openings roughly double the number of unemployed.
San Francisco Federal Reserve President Mary Daly said the central bank should tighten policy until inflation begins trending down towards the 2% targeting, echoing comments from Christopher Waller earlier in the week. Elsewhere, St. Louis President argued for aggressive rate increases to 3.5% which may be followed by rate cuts in 2023 or 2024. The S&P500 weakened -0.75% in broad weakness with 81% of stocks lower, and all sectors +1.76% but energy were down for the session. The Dow Jones was also -0.54% lower, as was the Nasdaq Composite -0.72% and Russell 2000 -0.49%, still the VIX edged -1.91% lower to 25.69. Treasury yields rose following Fed speakers with the 2-year rate up +8.5 basis points to 2.642% and both the 10 and 30-year rates increasing +6.2 and +1.1 basis points respectively.
European equities were also lower on Wednesday following weaker economic data ahead of the ECB policy meeting next week as policymakers try to reach a consensus view on how fast to normalise policy. German retail sales for April declined sharply by -5.4 for the month compared to estimates of -0.5% gain while the March figure was revised higher to +0.9%. Eurozone manufacturing activity slowed in May to 54.6 from 55.5 previously, modestly higher than forecasts although highlighted continued supply shortages, high prices and a fall in demand. The Euro Stoxx 600 declined -1.04% along with the DAX -0.33%, CAC -0.77% and FTSE100 -0.98% with all major benchmarks across the region lower. 10-year government bond yields climbed between +4 basis points in Switzerland and +9.8 in Greece as investors prepare for the ECB to tighten policy, with markets pricing in no change tonight but a +0.5% increase in July.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
The ASX is set for a weaker open with ASX200 futures down -56 points or -0.77% to 7,180. The index gained +0.30% on Wednesday driven by large-cap stocks masking underlying weakness with financials +1.22% offsetting weakness in other sectors, highlighted by the ASX200 equal weight index declining -1.17%. Lithium miners were notable underperformers with a slump triggered by a move in Argentina to reduce under-invoicing among lithium exporters, as well as a recent report by Goldman Sachs that lithium prices had peaked for now. PLS slumped -22%, along with LTR -19.1%, AKE -15.4% and IGO -11.71%. In economic data, the economy expanded more than forecast in Q1 driven by household consumption which grew +1.5% as well as a record $7.5 billion increase in inventories as businesses replenished stocks. Over the quarter the economy expanded +0.8% compared to estimates of +0.5%, while growing +3.3% over the year against +2.9% estimated. The Australian dollar is -0.26% weaker at 0.7177 and the yield on 10-year government bonds rose +6.8 basis points to 3.419%.
Oil gained ahead of an OPEC+ meeting today as well as the API reported crude oil inventories decreased -1.181m barrels last week against estimates of a -67k barrel draw. WTI and Brent crude rose +0.51% and +0.20% to US$115.26 and US$115.83 a barrel. Iron ore futures in Singapore edged +0.18% higher on Wednesday and are a further +0.85% higher at US$134.50 this morning. Gold rose +0.50% to US$1,846.60 despite a stronger USD and higher real yields suggesting demand for safe havens, silver also gained +1.31% to US$21.83 while Bitcoin slumped -6.82% to US$29,621.
Economic data:
- Australian Retail Sales (MoM Apr) 11:30
- U.S. ADP Employment (MoM May) 22:15
- U.S. Initial Jobless Claims (May 28th) 22:30
- U.S. Factory Orders (MoM Apr) 00:00
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.
