Rise and shine everyone!

What a day yesterday… quite a few surprises. Inflation data came in softer with encouraging signs. Shelter inflation continues to remain sticky coming in at 0.4% MoM for the fourth month in a row and Chair Powell later said that it may take several “years” for the lower rents to show up in the numbers.

But overall, inflation came in cooler than expected - Headline came in at 3.3% YoY vs. 3.4% Est; Core Inflation dropped to 3.4% YoY vs. 3.5% est. Both numbers came in lower than April’s reading. This sparked such a strong everything rally that even the Fed’s more hawkish dot plot showing only one cut in 2024 didn’t deter the market. Yields dropped post the CPI release in the strongest move since last year with the 10Y hitting 4.25% and then giving back only some of that decline after the Fed. The 10Y settled at 4.316%.

This strong move lower in yields could keep this rally going, particularly if yields stay below 4.5%. What we’ve learned from the Fed - they have already factored in a higher level of inflation for 2024 and they are not concerned about material weakening in growth or jobs. The rate cuts have essentially been pushed out to 2025 and 2026 but, the long-term rate has been increased.

US Equity Futures are trading higher this morning following yesterday’s strong move, positive Broadcom earnings, and Tesla after Musk received approval of his $56B pay package. I was watching Jim Chanos earlier today and while he’s a big Tesla bear, he says “a deal is a deal, even if it is a bad one” and so the approval is warranted. But he also didn’t miss adding that this is not a good thing for shareholders.

A note of caution though, the Russell 2000 is pulling back again and the Dow is flat. I’ve read a few pieces this morning advocating for a strong move in small caps, particularly with rates below 4.5%. I still remain wary because the Russell posted YoY EPS growth of about -16%. While we could see some momentum in a catch up trade, I’d be careful because growth still remains weak.

We have the PPI report for the US later today and that feeds more into the PCE report, so it will be one to watch. And the next major event is the Bank of Japan meeting late tonight (US) / early Friday (Asia). The Nikkei closed lower today ahead of the event.

BoJ - up next!

The Fed’s higher for longer puts the BoJ in a pickle, with a weaker Yen vs. the US Dollar. Rates in Japan also headed lower in tandem with USTs. The 10Y JGB yield fell below 1% and remains there. This makes the BoJ’s job harder as they have to introduce a tightening bias now. Their token rate hike is not cutting it anymore.

Inflation hasn’t been as strong as was hoped with the BoJ’s measure dropping below 2% once again. Nevertheless, consumer spending continues to remain weak and this is a major focus for many members on voting committee. The idea is that tightening could tame headline inflation and strengthen the currency enough that consumers can spend again, and not be deterred by high prices.

The major focus for this meeting however will be the bond purchases and not a rate hike. The consensus estimate is for a 1T Yen reduction in bond purchases, but the committee has not given any indication of what the decision may be. This will certainly weigh on the We may get a leak from the Nikkei later today!

Calendars

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