Breakfast BItes - Markets calmer

Rise and shine everyone.

As we head into a long 3-day weekend for the markets, we’re seeing a continuation of the pullback after the FOMC and yesterday’s PMI data. The strong PMI data with definite signs of improving activity and higher prices paid reinforces the higher-for-longer view.

Asian markets also closed lower across the board, except for India. Europe is also tracking lower this morning.

US Equity Futures are higher after yesterday’s pullback. The market was odd yesterday.

Mayhem pointed out that: “NVDA is 6.33% of the NASDAQ 100. The stock was bid up ~10.39% at the time contributing about 66 bps of the NASDAQ 100's upside yesterday. While the overall NASDAQ 100 was up 63 bps. NVDA is the market!”

We’re seeing some of that action spread to the rest of the market in early trading today as small caps gain some ground and yields calm down across the curve. Commodities are mixed, with oil pulling back to $76/bbl and heading for a weekly loss. Metals are higher.

Japan has an “opposite inflation” problem

Inflation numbers were released for Japan early this morning and contrary to what the BoJ wants to see, inflation is decelerating. We’ve long discussed that the BoJ has been waiting for a “virtuous” cycle of inflation to take hold, bringing Japan out of the decades of deflation. The good news from the recent wage increases were supposed to seal the deal for the BoJ and they even hiked because of that.

As the market now expects a second hike in June to prop up the Yen and bring prices down so consumer spending can resume, we’re seeing the inflation data decelerate anyway. This could very well mean that the BoJ holds off on hikes just yet and quite possibly even the tapering of bond purchases. The equity story in Japan continues to remain strong however, and we can’t get too bearish about the market. Companies just announced a record level of buybacks and EPS growth for the Topix is projected at ~10%.

US PMI

The US PMI report details significant cost increases in manufacturing, with the largest rise in 1.5 years across various inputs such as chemicals, metals, and plastics, along with higher energy and labor costs. Service-related costs primarily stemmed from labor expenses. Despite these increases, the costs were successfully passed along to consumers. Notably, the rate of inflation for both goods and services remains below the average recorded over the past 12 months.

S&P’s Chief Economist notes that economic growth has accelerated after a two-month soft patch, marking the fastest expansion in over two years, with expectations for above-trend GDP growth in Q2. Increased output is driven by a stronger order book and rising business confidence, despite uncertainty over inflation and interest rates. Selling prices have modestly increased, driven more by manufacturing than services. This suggests that while inflation remains elevated, it is not at pre-pandemic levels.

Chart of the Day

Developed Market PMIs moving into expansionary territory could be a key concern for inflation, increasing demand for commodities and causing prices to rise. While the US is acknowledging the higher fo longer stance, it begs the question of whether the ECB and the BoE will be able to follow the easing path that they want.

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