Rise and shine everyone.

It’s PCE Inflation Day and after yesterday’s quarterly data release, expectations are probably tempered. We get into that below but, it’s also been an extremely busy 24-hour news cycle so let’s get into it.

Software was down -5.4% yesterday, the largest decline in over 10 years. The entire cohort was dragged down by CRM (-19.8% worst in 19 years) after a rare revenue miss and weak guidance. The bottom line - the warnings for SAAS seems universal. Other earnings followed: PATH -35%, OKTA -6%, NOW -12%; MDB -24%; S -10%, and DELL -17.8% after hours on missed margins and high expectations. Most of the Mag 7 also closed lower.

We may see some continuation into today, unless month-end flows, Friday and a good PCE reading can hold up the market. So we have the setting, let’s see if we get the follow-through.

The S&P 500 is now just about at the 20-day moving average, while futures have crossed below. The Russell 2000 and DJIA are firmly below. The Nasdaq is the only one still holding above.

S&P 500 options suggest that the market has also slipped into negative gamma territory so we are in chase mode. Moves will be magnified.

Euro Area inflation data released this morning shows inflation ticking higher, putting pressure on equities. Not likely to deter a cut next week but, we may see a slower pace of easing:

• EA Headline came in at 2.6% YoY vs. 2.4% prior and 2.5% consensus

• Core Inflation came in at 2.9% yoy vs. 2.7% prior and 2.8% consensus

US PCE Preview and US GDP Growth Decline

The market is ready for a hotter-than-expected PCE inflation release. Yesterday’s quarterly PCE number came in significantly higher (no surprise!). So, even a slightly cooler print may see the market move higher and reverse the current trend, particularly in a negative gamma environment.

Reminder: PCE always tends to run cooler than CPI because:

• CPI has a higher weighting in Housing, Energy, Food and Motor Vehicles. PCE has a higher weighting in Core Goods, Medical Services, and Other Core Services. All the mentioned CPI items have been running hotter while, core goods have seen some deflation.

• Insurance calculations are taken as premiums paid for CPI. For the PCE, insurance claims are subtracted from the insurance premiums paid. So, it’s obvious that the number will be lower for the PCE calculation.

• Finally, studies show that PCE measures consumer substitution better. So as consumers trade down to cheaper (maybe, white label) goods, the PCE moves lower more quickly than the CPI.

Real GDP growth was revised down by 0.3% to an annualized rate of +1.3% for the first quarter, aligning with consensus expectations. This adjustment reflects a decrease in consumption growth, which was offset by upward revisions in the housing and capital expenditure categories.

Presidential Issues

• Former President Donald Trump has lost his case and is now a convicted felon. According to CNN, this does not bar him from beginning president. The sentencing is set to take place on July 11, before the Republican National Convention and most analysts believe he will not be doing prison time since it’s his first offence. So he’s still the Republican candidate and he can still run for president. While he may take an initial hit to approval ratings, he still has a good chance of succeeding which means, positioning for Republican policies is still a viable trade.

• President Biden has agreed to allow Ukraine to use US weapons inside Russia but just a limited region around Kharkiv. The market sold off into the close just as the news broke out and this could be the reason. Not only does this mean escalation and possible targeting of the US but, the immediate concern is the disruption of oil and commodity supplies coming out of Russia. Let’s keep an eye on oil prices and broader commodity prices.

Asia Data Mixed - China Manufacturing Slows

Asian markets are higher this morning for the first time this week. China continues to move lower on the mfg PMI miss, also weighing on metals.

• Japan - Tokyo CPI: Aligned with estimates.

• Japan - Retail Sales (April): Higher than March and last year, exceeding expectations.

• Japan - Industrial Production (April): Weaker than expected; drop due to lower transport equipment output (excluding motor vehicles). May outlook positive due to increased auto production. Toyota's issues resolved.

• China - Manufacturing PMI (May 49.5 V 50.5E): Unexpected contraction, first in three months despite government support. This may continue to weigh on copper, which has been selling off for the last two days.

• South Korea - Industrial Production (April): Fastest annualized growth since January. (Export Import data out later today)

Quote of the Day

Fed’s Williams (voter) - Recently seen a dearth of progress in disinflation data, but does not mean there has been a change in trend. Expect unemployment at 4% by end of year. Wage gains still too high relative to 2% goal.

Charts of the Day

S&P 500 Sector Snapshots - Utilities lead the way. Look out for continuation. This is a classic stagflation trade.

Calendars

(news taken from Reuters, FT, Bloomberg; Calendar from Trading Economics)