TradeDay Macro Matters
Macroeconomic / Geopolitical developments
- US debt ceiling agreement is close… finally!
- Yields move higher as the hawks flap their wings again
US debt ceiling set to be resolved
According to House Speaker Kevin McCarthy a deal to raise the debt ceiling is “doable” and maybe as soon as Sunday. The game of brinkmanship seems to be coming to an end. We can all breathe a sigh of relief that the US is not going to have a self-inflicted, catastrophic default that would send huge shockwaves through financial markets around the globe.
This has been fuelling a risk-positive rally in recent days. However, the big question will be for how long? Will investors see this as a big millstone having been removed, or will the focus turn back on the developing US economic slowdown?
Treasury yields move sharply higher
One key move is that Treasury yields have moved sharply higher in recent days. This comes as traders are repricing for more potential rate hikes from the Fed. On Friday, the interest rate-sensitive 2-year Treasury yield moved above 4.25% which has been a big barrier in recent weeks. The US 10-year yield is above 3.64% to its highest since mid-March (as yields were falling sharply in the wake of the US banking crisis).
Currently, markets are pricing between 10 and 15 basis points of additional hikes, so there is more room to run in this if a +25bps Fed rate hike is a serious prospect in June. FOMC hawks such as Thomas Barkin are flapping their wings again suggesting that he was “comfortable” with higher rates if needed to defeat inflation.
The US
- A curious USD recovery
- A remarkable NASDAQ bull run
- US earnings season, the takeaways
A curious USD rally
There has been an interesting turnaround in the fortunes of the USD in recent days. An ongoing trend of underperformance has flipped higher. It originally looked as though the debt ceiling was causing a safe haven bias. A bear flattener on the yield curve supported the USD. However, apparent moves towards an agreement on the debt ceiling have also been met with a strengthening USD. Curious indeed.
A re-pricing of Fed rate hike expectations suggesting the market is now beginning to price back in the possibility of a 25bps rate hike in June. CME Group FedWatch has been rising all week and is currently at around a 39% probability. If this continues, the USD rally will have legs. The Dollar Index has broken a seven-month downtrend and is above a pivot level around 102.80 which is now a basis of support.
A remarkable NASDAQ breakout
There have been remarkable gains in tech stocks in 2023. Given an added near-term boost by recent newsflow of progress in the US debt ceiling, this has driven a big breakout on the e-mini NASDAQ 100 futures, which now trade at levels not seen since April 2022. However, this is flying in the face of higher Treasury yields too. Subsequently, with technical momentum signals such as the Relative Strength Index over 70, this is becoming a rally that will increasingly need to be treated with caution. The prospect of profit-taking may come into play soon.
US earnings season – the takeaways
With earnings season over all bar the shouting (around 95% of companies having now reported) we leave with a few key takeaways. The tech stocks were the big winners. With share prices soaring for the tech giants such as Alphabet, Microsoft and Facebook, investors will be left with a sense of satisfaction.
The broader picture is not so rosy though. According to Factset data, blended earnings for the S&P 500 will likely show a decline of around -2% (albeit above the original expectation of -6.7% on 31st March). However, there has been an overweight of companies issuing negative EPS guidance which suggests Q2 is looking shaky.
Subsequently, whilst the NASDAQ has been flying, away from the tech giants, the S&P 500 and to a greater extent, the Dow have been relatively sluggish. Although the debt ceiling progress has fuelled a near-term rally, under the hood, the strength in US equities is not so healthy. The advance/decline lines for all the major US markets (aside from the NASDAQ 100) have been topping out. It is all well and good whilst the tech stocks burst higher, but any sign of this rally in tech stocks hitting the buffers will weigh heavily on US equity markets.
What’s next?
The calendar is fairly light again, but US Core PCE will be watched. Inflation is gradually trending lower, but further signs of the pace of reduction slowing will be picked up on as being hawkish for rates. The early forecasts for the flash PMIs imply sluggish growth but at least remaining in expansion territory.
Traders should also keep an eye on the clutch of housing data this week too. Last week’s deterioration in Existing Home Sales showed signs of a lack of affordability for mortgages that have doubled over the past 18 months, in addition to falling prices and increased supply. New Home Sales should be watched.
Earnings season is pretty much capped off with NVIDIA this week. The fifth-largest company (by market cap) on the S&P 500 is realistically the last market-moving earnings announcement of the Q1 earnings season.
Europe
- UK inflation will be key for the Bank of England
- A breakout on the DAX
UK inflation will be eyed by the Bank of England
GBP has continued to be one of the better-performing major currencies in recent weeks as the Bank of England has suggested that further rate hikes may be needed. The UK CPI inflation will therefore be key on Wednesday. Headline CPI is expected to drop from above 10% to 8.3% as energy price hikes from 2022 drop out of the data set. However, core CPI is expected to sit a 6.2% still. If so, then the Bank of England will surely be on track to continue to hike again in the coming two meetings. This would help to prop up GBP once more.
German DAX Index soars to all-time highs
Equity markets have been soaring in recent sessions as traders have been pricing out the possibility of a calamitous debt ceiling driven US default. The German DAX is packed with exporting manufacturers and is geared towards risk-on trading. Hence the index soared above 16,000 on a breakout to all-time highs. The index is still not yet especially overbought either, although 17000 might be a stretch before profit-taking hits.
What’s next?
UK CPI inflation will be a key driver of GBP this week, whilst EUR traders will be focusing more on the Eurozone Consumer Confidence and German Ifo Business Climate.
Asia
- A breakout on USD/JPY
- The recovery in the Nikkei is at multi-decade highs
USD/JPY breaks higher
The sharp move higher has added almost 25 basis points to the 10-year US Treasury yield this week. Compare that with the stagnant 10-year JGB which has gone absolutely nowhere. This goes a long way to explaining the breakout on USD/JPY above 138 for a near six-month high this week. The yield differential is a crucial driver of this move, so if US yields continue higher, we can expect USD/JPY longs to perform well.
The soaring Nikkei
Japanese stocks have been on an incredible run in recent weeks. The move has accelerated back above 30,000 to leave the Nikkei 225 at its highest level since August 1990 (just in case you were wondering, the all-time high was 38,957 in December 1989). The index is also more overbought on the RSI momentum indicator than at any time since 2017.
That sounds great but I am watching for exhaustion signals and signs of reversal. These things tend to unwind just as fast once the bulls run out of steam.
What’s next?
With a very quiet economic calendar for the major Asian/Australasian economies, there will be a sense of playing follow my leader this week on moves from US markets.
Commodities
- Oil still unable to break the shackles in a rally
- Gold hit by the old one-two punch
A mixed week for oil
The oil price is being pulled around by a multitude of factors affecting oil demand. The negative impact of disappointing Chinese data and concerns over a US economic slowdown is being countered by the debt ceiling hope and the US re-stocking its Strategic Petroleum Reserves. No wonder then that the oil price has been choppy in recent sessions. However, perhaps it is interesting that the debt ceiling news has not given traction to a sustaining rally. Reaction to the near-term resistance at $73.89 on NYMEX oil futures will be watched as a gauge this week.
Gold dives to complete a top
With the chances of a damaging US debt default being priced out, the flow into safe havens such as gold is reversing. However, when this is combined with a stronger USD too, this all adds up to a big slide lower in Gold futures. Having peaked at $2072 just over two weeks ago, the futures have dropped more than a hundred bucks. Breaking the support at $1970 has also completed a top pattern which implies a retreat towards $1900 in due course. Reaction to a rebound will now be key, with overhead supply between $1970/$2004 which will house a lot of sellers now.
On the calendar
Central Banks
There are no central bank announcements to worry about this week (unless you’re trading exotics such as the Korean won, Indonesian rupiah or Turkish lira). As yet, there are no Fed speakers scheduled, but if there are any, as ever at the moment they will be poured over for any hawkish leanings.
Macro data
Date | Major Macro Data |
22/05/2023 | Eurozone Consumer Confidence (flash) |
23/05/2023 | Flash PMIs for Japan, the Eurozone, the UK and the US; New Home Sales, Richmond Fed Manufacturing |
24/05/2023 | UK CPI inflation, German Ifo Business Climate, FOMC minutes |
25/05/2023 | US Weekly Jobless Claims, Pending Home Sales |
26/05/2023 | UK Retail Sales, US Goods Trade Balance, US Durable Goods Orders, US Core PCE inflation, final Michigan Sentiment |
Steve Miley
Co-Founder of TradeDay.
Steve is the former head of Technical Analaysis research at Merrill Lynch and Credit Suisse, and owner of the award winning research boutique Market Chartist.
